10-K

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, 2008

Commission File No. 001-12257

MERCURY GENERAL CORPORATION

(Exact name of registrant as specified in its charter)

California	95-2211612
(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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   

Yes T No £

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   

Yes £ No T

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 T 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.   T

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer T	Accelerated filer £
Non-accelerated filer £	Smaller reporting company £

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes £ No T

The aggregate market value of the Registrant’s common equity held by non-affiliates of the Registrant at June 30, 2008 was approximately $1,245,000,000 (based upon the closing sales price on the New York Stock Exchange for such date, as reported by the Wall Street Journal).

At February 17, 2009, the Registrant had issued and outstanding an aggregate of 54,769,713 shares of its Common Stock.

Documents Incorporated by Reference

Portions of the definitive proxy statement for the Annual Meeting of Shareholders of the Registrant to be held on May 13, 2009 are incorporated herein by reference into Part III hereof.

PART I

Item 1. Business

General

Mercury General Corporation (“Mercury General”) and its subsidiaries (collectively, the “Company”) are engaged primarily in writing automobile insurance in a number of states, principally California.  The Company also writes homeowners, mechanical breakdown, commercial and dwelling fire, and commercial property insurance.  The direct premiums written during 2008 by state and line of business were:

	Year ended December 31, 2008
	(Amounts in thousands)
	Private Passenger Auto			Commercial Auto			Homeowners			Other Lines			Total
California	$	1,842,129		$	72,050		$	204,027		$	52,993		$	2,171,199		78.9	%
Florida		145,952			16,272			15,892			8,921			187,037		6.8	%
New Jersey		84,028			-			-			304			84,332		3.1	%
Texas		74,690			9,995			1,473			17,368			103,526		3.8	%
Other states		157,438			8,826			12,641			26,895			205,800		7.5	%
Total	$	2,304,237		$	107,143		$	234,033		$	106,481		$	2,751,894		100.0	%
		83.7	%		3.9	%		8.5	%		3.9	%		100.0	%

The Company offers automobile policyholders the following types of coverage: bodily injury liability, underinsured and uninsured motorist, personal injury protection, property damage liability, comprehensive, collision and other hazards. The Company’s published maximum limits of liability for private passenger automobile insurance are, for bodily injury, $250,000 per person and $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 program.  However, under the majority of the Company’s automobile policies, the limits of liability are equal to or less than $100,000 per person and $300,000 per accident for bodily injury and $50,000 per accident for property damage.

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 also owns office buildings in Rancho Cucamonga and Folsom, California, which are used to support the Company’s California operations and future expansion, and office buildings located in St. Petersburg, Florida and in Oklahoma City, Oklahoma, which house employees of the Company and several third party tenants.  The Company maintains branch offices in a number of locations in California as well as branch offices in Richmond, Virginia; Latham, New York; Bridgewater, New Jersey; Vernon Hills, Illinois; Atlanta, Georgia; and Austin, Houston and San Antonio, Texas.  The Company has approximately 5,000 employees.

Website Access to Information

The internet address for the Company’s website is www.mercuryinsurance.com.  The internet address provided in this Annual Report on Form 10-K is not intended to function as a hyperlink and the information on the Company’s website is not and should not be considered part of this report and is not incorporated by reference in this document.  The Company makes available on its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports (the “SEC Reports”) filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Federal securities laws, as soon as reasonably practicable after each SEC Report is filed with or furnished to the SEC.  In addition, copies of the SEC Reports are available, without charge, upon written request to the Company’s Chief Financial Officer, Mercury General Corporation, 4484 Wilshire Boulevard, Los Angeles, California 90010.

2

Organization

Mercury General, an insurance holding company, is the parent of Mercury Casualty Company, a California automobile insurer founded in 1961 by George Joseph, the Company’s Chairman of the Board of Directors.  Including MCC, Mercury General has eighteen subsidiaries.  The Company’s insurance operations are conducted through the following insurance subsidiaries:

Insurance Companies	Date Formed or Acquired	A.M. Best Ratings		Primary States
Mercury Casualty Company ("MCC")	January 1961		A+	CA, AZ, FL, NV, NY, VA
Mercury Insurance Company ("MIC")	November 1972		A+	CA
California Automobile Insurance Company ("CAIC")	June 1975		A+	CA
California General Underwriters Insurance Company ("CGU")	April 1985	Non rated		CA
Mercury Insurance Company of Illinois ("MIC IL")	August 1989		A+	IL
Mercury Insurance Company of Georgia ("MIC GA")	March 1989		A+	GA
Mercury Indemnity Company of Georgia ("MID GA")	November 1991		A+	GA
Mercury National Insurance Company ("MNIC")	December 1991		A+	IL, MA
American Mercury Insurance Company ("AMI")	December 1996		A-	OK, FL, GA, TX
American Mercury Lloyds Insurance Company ("AML")	December 1996		A-	TX
Mercury County Mutual Insurance Company ("MCM")	September 2000		A-	TX
Mercury Insurance Company of Florida ("MIC FL")	August 2001		A+	FL, PA
Mercury Indemnity Company of America ("MIDAM")	August 2001		A+	NJ
Non-Insurance Companies	Date Formed or Acquired	Purpose
Mercury Select Management Company, Inc. ("MSMC")	August 1997	AML's attorney-in-fact
American Mercury MGA, Inc. ("AMMGA")	August 1997	General agent
Concord Insurance Services, Inc. ("Concord")	October 1999	Inactive insurance agent since 2006
Mercury Insurance Services, LLC ("MIS LLC")	November 2000	Management services to subsidiaries
Mercury Group, Inc. ("MGI")	July 2001	Inactive insurance agent since 2007

           Mercury General and its subsidiaries are referred to collectively as the “Company” unless the context indicates otherwise.  All of the subsidiaries as a group, excluding MSMC, AMMGA, Concord, MIS LLC and MGI, are referred to as the “Insurance Companies.” The term “California Companies” refers to MCC, MIC, CAIC and CGU.

On October 10, 2008, MCC entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Aon Corporation, a Delaware corporation, and Aon Services Group, Inc., a Delaware corporation.  Pursuant to the terms of the Purchase Agreement effective January 1, 2009, MCC acquired all of the membership interest of AIS Management LLC, a California limited liability company, which is the parent company of Auto Insurance Specialists, LLC (“AIS”) and PoliSeek AIS Insurance Solutions, Inc.

3

Production and Servicing of Business

The Company sells its policies through approximately 4,700 independent agents and brokers, of which approximately 1,000 are located in each of California and Florida.  The remainder are located in Georgia, Illinois, Texas, Oklahoma, New York, New Jersey, Virginia, Pennsylvania, Arizona, Nevada and Michigan.  Over 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 contracted by the Company.

No agent or broker accounted for more than 2% of direct premiums written except for AIS that produced approximately 15%, 14% and 13% during 2008, 2007, and 2006, respectively, of the Company’s direct premiums written.

The Company believes that it compensates its agents and brokers above the industry average.  During 2008, total commissions incurred were approximately 17% of net premiums written.

The Company’s advertising budget is allocated among television, newspaper, internet and direct mailing media to provide the best coverage available within targeted media markets.  While the majority of these advertising costs are borne by the Company, a portion of these costs are reimbursed by the Company’s independent agents based upon the number of account leads generated by the advertising. The Company believes that its advertising program is important to create brand awareness and to remain competitive in the current insurance climate.  During 2008, net advertising expenditures were $26 million.

Underwriting

The Company sets its own automobile insurance premium rates, subject to rating regulations issued by the Departments of Insurance (“DOI”) or similar governmental agencies of the applicable states.  Automobile insurance rates on voluntary business in California are subject to prior approval by the California DOI. The Company uses its own extensive database to establish rates and classifications.  Automobile liability insurers in California are also required to sell insurance to a proportionate number of drivers applying for placement as “assigned risks” based on the insurer’s share of the California automobile casualty insurance market. The California DOI has rating factor regulations in effect that influence the weight the Company ascribes to various classifications of data.  See “Regulation.”

At December 31, 2008, “good drivers” (as defined by the California Insurance Code) accounted for approximately 80% of all voluntary private passenger automobile policies in force in California, while higher risk categories accounted for approximately 20%.  The private passenger automobile renewal rate in California (the rate of acceptance of offers to renew) averages approximately 95%.  The Company also offers homeowners, commercial property and commercial automobile and mechanical breakdown insurance in California.

In states outside of California, the Company offers standard, non-standard and preferred private passenger automobile insurance.  Private passenger automobile policies in force for non-California operations represented approximately 20% of total private passenger automobile policies in force at December 31, 2008.  In addition, the Company offers mechanical breakdown insurance in many states outside of California and homeowners insurance in Florida, Illinois, Oklahoma, New York, Georgia, and Texas.

Claims

Claims operations are conducted by the Company.  The claims staff 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.

4

Loss and Loss Adjustment Expense Reserves and Reserve Development

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 Company’s ultimate liability may be greater or less than reported loss reserves.  Reserves are closely monitored and are analyzed quarterly by the Company’s actuarial consultants using current 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, however, requires the Company to discount loss reserves for Federal income tax purposes.

For a reconciliation of beginning and ending reserves for losses and loss adjustment expenses, net of reinsurance deductions, as reflected on the Company’s consolidated financial statements for the periods indicated, see Note 7 of Notes to Consolidated Financial Statements.

During 2008, the Company experienced pre-tax losses of approximately $20 million in the fourth quarter from Southern California fire storms and approximately $6 million in the third quarter from Hurricane Ike in Texas.

The difference between the reserves reported in the Company’s consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and those reported in the statements filed with the DOI in accordance with statutory accounting principles (“SAP”) is shown in the following table:

	December 31,
	2008		2007		2006
	(Amounts in thousands)
Reserves reported on a SAP basis	$	1,127,779	$	1,099,458	$	1,082,393
Reinsurance recoverable		5,729		4,457		6,429
Reserves reported on a GAAP basis	$	1,133,508	$	1,103,915	$	1,088,822

Under SAP, reserves are stated net of reinsurance recoverable whereas under GAAP, reserves are stated gross of reinsurance recoverable.

The following table presents the development of loss reserves for the period 1998 through 2008.  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 amount represents the estimated net losses and loss adjustment expenses for claims arising from the current and all prior years that are unpaid at the balance sheet date, including an estimate for 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.  Estimates change 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, 2008.

5

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.

	December 31,
	1998			1999			2000			2001			2002			2003			2004			2005			2006			2007			2008
	(Amounts in thousands)
Net reserves for losses and
loss adjustment
expenses	$	385,816		$	418,800		$	463,803		$	516,592		$	664,889		$	786,156		$	886,607		$	1,005,634		$	1,082,393		$	1,099,458		$	1,127,779
Paid (cumulative) as of:
One year later		263,805			294,615			321,643			360,781			438,126			461,649			525,125			632,905			674,345			715,846
Two years later		366,908			403,378			431,498			491,243			591,054			628,280			748,255			891,928			975,086
Three years later		395,574			429,787			462,391			528,052			637,555			714,763			851,590			1,027,781
Four years later		402,000			439,351			476,072			538,276			655,169			740,534			893,436
Five years later		405,910			446,223			478,158			545,110			664,051			750,927
Six years later		409,853			445,892			481,775			549,593			667,277
Seven years later		408,138			446,489			484,149			550,768
Eight years later		408,321			446,777			485,600
Nine years later		408,567			447,654
Ten years later		408,672
Net reserves re-estimated as of:
One year later		393,603			442,437			480,732			542,775			668,954			728,213			840,090			1,026,923			1,101,917			1,188,100
Two years later		407,047			449,094			481,196			549,262			660,705			717,289			869,344			1,047,067			1,173,753
Three years later		410,754			446,242			483,382			546,667			662,918			745,744			894,063			1,091,131
Four years later		409,744			449,325			482,905			545,518			666,825			750,859			910,171
Five years later		410,982			448,813			480,740			550,123			668,318			755,970
Six years later		411,046			447,225			483,392			551,402			669,499
Seven years later		408,857			447,362			485,328			551,745
Eight years later		409,007			447,272			486,078
Nine years later		408,942			447,976
Ten years later		408,972
Net cumulative redundancy
(deficiency)	$	(23,156	)	$	(29,176	)	$	(22,275	)	$	(35,153	)	$	(4,610	)	$	30,186		$	(23,564	)	$	(85,497	)	$	(91,360	)	$	(88,642	)
Gross liability-end of year	$	405,976		$	434,843		$	492,220		$	534,926		$	679,271		$	797,927		$	900,744		$	1,022,603		$	1,088,822		$	1,103,915		$	1,133,508
Reinsurance recoverable		(20,160	)		(16,043	)		(28,417	)		(18,334	)		(14,382	)		(11,771	)		(14,137	)		(16,969	)		(6,429	)		(4,457	)		(5,729	)
Net liability-end of year	$	385,816		$	418,800		$	463,803		$	516,592		$	664,889		$	786,156		$	886,607		$	1,005,634		$	1,082,393		$	1,099,458		$	1,127,779
Gross re-estimated liability-latest	$	440,039		$	474,642		$	525,737		$	581,501		$	695,729		$	785,216		$	937,357		$	1,120,245		$	1,190,483		$	1,199,836
Re-estimated recoverable-latest		(31,068	)		(26,666	)		(39,659	)		(29,756	)		(26,230	)		(29,246	)		(27,187	)		(29,114	)		(16,730	)		(11,735	)
Net re-estimated liability-latest	$	408,972		$	447,976		$	486,078		$	551,745		$	669,499		$	755,970		$	910,171		$	1,091,131		$	1,173,753		$	1,188,100
Gross cumulative
redundancy (deficiency)	$	(34,063	)	$	(39,799	)	$	(33,517	)	$	(46,575	)	$	(16,458	)	$	12,711		$	(36,613	)	$	(97,642	)	$	(101,661	)	$	(95,921	)

6

For the years 2005 through 2007, the Company experienced negative development on loss reserves ranging from $85 million to $91 million.  The negative development from these years relates primarily to increases in loss severity estimates and defense and cost containment expense estimates for the California Bodily Injury coverage as well as increases in the provision for losses in New Jersey.  See “Critical Accounting Estimates-Reserves” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

For 2004, the negative development relates to an increase in the Company’s prior accident years’ loss estimates for personal automobile insurance in Florida and New Jersey.  In addition, an increase in estimates for loss severity for the 2004 accident year reserves for California and New Jersey automobile lines of business contributed to the deficiencies.

For 2003, loss redundancies largely relate to lower inflation than originally expected on the bodily injury coverage reserves for the California automobile insurance lines of business.  In addition, the Company experienced a reduction in expenditures to outside legal counsel for the defense of personal automobile claims in California. This led to a reduction in the ultimate expense amount expected to be paid out and therefore a redundancy in the reserves established at December 31, 2003. Partially offsetting these loss redundancies was adverse development in the Florida and New Jersey automobile lines of business.

For years 1998 through 2002, the Company’s previously estimated loss reserves produced deficiencies which were reflected in the subsequent years’ incurred losses.  The Company attributes a large portion of the deficiencies to increases in the ultimate liability for bodily injury, physical damage and collision claims over what was originally estimated.  The increases in these losses 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.

Operating Ratios

Loss and Expense Ratios

Loss and underwriting expense ratios are used to interpret the underwriting experience of property and casualty insurance companies.

Under SAP, losses and loss adjustment expenses 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 Insurance Companies’ 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 Insurance Companies’ ratios include lines of insurance other than private passenger automobile.  Since these other lines represent only 16.3% of premiums written, the Company believes its ratios can be compared to the industry ratios included in the following table.

	Year ended December 31,
	2008			2007			2006			2005			2004
Loss Ratio		73.3	%		68.0	%		67.4	%		65.4	%		62.6	%
Expense Ratio		28.5	%		27.1	%		27.1	%		26.5	%		26.4	%
Combined Ratio		101.8	%		95.1	%		94.5	%		91.9	%		89.0	%
Industry combined ratio (all writers) (1)		98.5	% (2)		98.3	%		95.5	%		95.1	%		94.4	%
Industry combined ratio (excluding direct writers) (1)		N/A			96.2	%		94.7	%		94.5	%		93.9	%

(1)       Source: A.M. Best, Aggregates & Averages (2005 through 2008), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).

(2)          Source:  A.M. Best, “2009 Special Report U.S. Property/Causality-Review & Preview, February 9, 2009”

(N/A)     Not available.

7

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 over which net premiums were earned, rather than to the period that net premiums were written.  The following table sets forth the Insurance Companies’ loss ratio, expense ratio and combined ratio determined in accordance with GAAP for the last five years.

	Year ended December 31,
	2008			2007			2006			2005			2004
Loss Ratio		73.3	%		68.0	%		67.4	%		65.4	%		62.6	%
Expense Ratio		28.5	%		27.4	%		27.6	%		27.0	%		26.6	%
Combined Ratio		101.8	%		95.4	%		95.0	%		92.4	%		89.2	%

Premiums to Surplus Ratio

The following table reflects, for the periods indicated, the Insurance Companies’ statutory ratios of net premiums written to policyholders’ surplus.  Widely recognized guidelines established by the National Association of Insurance Commissioners (“NAIC”) indicate that this ratio should be no greater than 3 to 1.

	Year ended December 31,
	2008		2007		2006		2005		2004
	(Amounts in thousands, except ratios)
Net premiums written	$	2,750,226	$	2,982,024	$	3,044,774	$	2,950,523	$	2,646,704
Policyholders' surplus	$	1,371,095	$	1,721,827	$	1,579,248	$	1,487,574	$	1,361,072
Ratio	2.0 to 1		1.7 to 1		1.9 to 1		2.0 to 1		1.9 to 1

Risk-Based Capital

The NAIC employs a risk-based capital formula for casualty insurance companies that establishes recommended minimum capital requirements for casualty companies.  The formula was 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 calculated the risk-based capital requirements of each of the Insurance Companies as of December 31, 2008.  As of such date, each of the Insurance Companies’ policyholders’ surplus exceeded the highest level of minimum required capital.

8

Statutory Accounting Principles

The Company’s results are reported in accordance with GAAP, which differ from amounts reported in accordance with SAP as prescribed by insurance regulatory authorities. Specifically, under GAAP:

• Policy acquisition costs such as commissions, premium taxes and other variable costs incurred in   connection with writing new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP.

• Certain assets are included in the consolidated balance sheets whereas, under SAP, such assets are  designated as “nonadmitted assets,” and charged directly against statutory surplus. These assets consist primarily of premium receivables outstanding more than 90 days, federal deferred tax assets in excess of statutory limitations, state deferred taxes, furniture, equipment, leasehold improvements, capitalized software, and prepaid expenses.

• Amounts related to ceded reinsurance are shown gross as prepaid reinsurance premiums and reinsurance recoverables, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.

• Fixed maturities securities are reported at fair value, rather than at amortized cost, or the lower of amortized cost or fair value, depending on the specific type of security, as required by SAP.

• The differing treatment of income and expense items results in a corresponding difference in federal income tax expense.  Changes in deferred income taxes are reflected as an item of income tax benefit or expense, rather than recorded directly to statutory surplus as regards policyholders, as required by SAP.  Admittance testing under SAP may result in a charge to unassigned surplus for non-admitted portions of deferred tax assets.  Under GAAP, a valuation allowance may be recorded against the deferred tax assets and reflected as an expense.

• Certain assessments paid to regulatory agencies that are recoverable from policy holders in future periods are expensed whereas these amounts are recorded as receivables under SAP.

Investments and Investment Results

General

The Company’s investments are directed by the Company’s Chief Investment Officer under the supervision of the Company’s Board of Directors.  The Company follows an investment policy that is regularly reviewed and revised.  The Company’s policy emphasizes investment grade, fixed income securities and maximization of after-tax yields and places certain restrictions to limit portfolio concentrations and market exposure.  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, including the impact of the alternative minimum tax (“AMT”), are important in portfolio management.  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 Company closely monitors the timing and recognition of capital gains and losses to maximize the realization of any deferred tax assets arising from capital losses.  At December 31, 2008, the Company had available tax gains carried forward of approximately $43 million.

9

Investment Portfolio

The following table sets forth the composition of the Company’s investment portfolio:

	December 31,
	2008				2007				2006
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Amounts in thousands)
Taxable bonds	$	313,218	$	286,441	$	440,028	$	437,838	$	583,602	$	577,575
Tax-exempt state and municipal bonds		2,360,874		2,179,178		2,418,348		2,447,851		2,264,321		2,317,646
Redeemable fund preferred stocks		54,379		16,054		2,079		2,071		3,792		3,766
Total fixed maturities		2,728,471		2,481,673		2,860,455		2,887,760		2,851,715		2,898,987
Equity investments including
non-redeemable preferred stocks		403,773		247,391		330,995		428,237		258,310		318,449
Short-term investments		208,278		204,756		272,678		272,678		282,302		282,302
Total investments	$	3,340,522	$	2,933,820	$	3,464,128	$	3,588,675	$	3,392,327	$	3,499,738

The Company continually evaluates the recoverability of its investment holdings.  Prior to the adoption of Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of Financial Accounting Standards Board (“FASB”) Statement No. 115” (“SFAS No. 159”), when a decline in value of fixed maturities or equity securities was considered other than temporary, the Company wrote the security down to fair value by recognizing a loss in the consolidated statement of operations. Declines in value considered to be temporary were charged as unrealized losses to shareholders’ equity as a reduction of accumulated other comprehensive income.  See “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 2 of Notes to Consolidated Financial Statements.

At December 31, 2008, approximately 74% of the Company’s total investment portfolio at fair value and 88% of its total fixed maturity investments at fair value were invested in tax-exempt municipal bonds.  Shorter duration sinking fund preferred stocks and collateralized mortgage obligations together represented 7.5% of the Company’s total investment portfolio at fair value.  The weighted average Standard & Poor’s, Moody’s and Fitch’s rating of the Company’s bond holdings was AA at December 31, 2008.  Holdings of lower than investment grade bonds and non rated bonds constituted approximately 1.9% and 1.7%, respectively, of total invested assets at fair value.

The nominal average maturity of the overall bond portfolio, including collateralized mortgage obligations and short-term investments, was 13.9 years at December 31, 2008, which reflects a portfolio heavily weighted in investment grade tax-exempt municipal bonds.  The call-adjusted average maturity of the overall bond portfolio was approximately 10.8 years, related to holdings which are heavily weighted with high coupon issues that are expected to be called prior to maturity.  The modified duration of the overall bond portfolio reflecting anticipated early calls was 7.2 years at December 31, 2008, including collateralized mortgage obligations with modified durations of approximately 1.7 years and short-term investments that carry no duration.  Modified duration measures the length of time it takes, on average, to receive the present value of all the cash flows produced by a bond, including reinvestment of interest. Because it measures four factors (maturity, coupon rate, yield and call terms), which determine sensitivity to changes in interest rates, modified duration is considered a better indicator of price volatility than simple maturity alone.  The longer the duration, the greater the price volatility in relation to changes in interest rates.

Equity holdings consist of perpetual preferred stocks and dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion. At year end, short-term investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis. The Company does not have any material direct equity investment in subprime lenders.

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Investment Results

The following table summarizes the investment results of the Company for the most recent five years:

	Year ended December 31,
	2008			2007			2006			2005			2004
	(Amounts in thousands)
Average invested assets (includes short-term
investments) (1)	$	3,452,803		$	3,468,399		$	3,325,435		$	3,058,110		$	2,662,224
Net investment income:
Before income taxes		151,280			158,911			151,099			122,582			109,681
After income taxes		133,721			137,777			127,741			105,724			95,897
Average annual yield on investments:
Before income taxes		4.4	%		4.6	%		4.5	%		4.0	%		4.1	%
After income taxes		3.9	%		4.0	%		3.8	%		3.5	%		3.6	%
Net realized investment (losses) gains after
income taxes (2)		(357,838	)		13,525			10,033			10,504			16,292
Net increase (decrease) in unrealized gains/
losses on investments after income
taxes (3)	$	-		$	10,905		$	3,103		$	(14,000	)	$	(4,284	)

(1) Fixed maturities at amortized cost, and equities and short-term investments at cost before write-downs.

(2) Includes investment impairment write-down, net of tax benefit, of $14.7 million in 2007, $1.3 million in 2006, $1.4 million in 2005 and $0.6 million in 2004.  2007 also includes $1.3 million gain, net of tax, and $0.9 million loss, net of tax benefit, related to the change in the fair value of trading securities and hybrid financial instruments, respectively.

(3) Effective January 1, 2008, the Company adopted SFAS No. 159.  The losses and gains due to changes in fair value for items measured at fair value pursuant to election of the fair value option were included in net realized investment losses and gains.

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Competitive Conditions

The property and casualty insurance industry is highly competitive and consists of a large number of multi-state competitors offering automobile, homeowners, commercial property insurance, and other lines.  Many of the Company’s competitors have larger volumes of business and greater financial resources than those of the Company.  Based on the most recent regularly published statistical compilations of premiums written in 2007, the Company was the third largest writer of private passenger automobile insurance in California and the fourteenth largest in the United States.  Competitors with greater market share in California sell insurance through exclusive agents, rather than through independent agents and brokers.

The property and casualty insurance industry is highly cyclical, characterized by periods of high premium rates and shortages of underwriting capacity (“hard market”) followed by periods of severe price competition and excess capacity (“soft market”).  In management’s view, 2004 through 2007 was a period of very profitable results for companies underwriting automobile insurance. Many in the industry began experiencing declining profitability in 2007 and 2008.

Reputation for service and price 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, the marketing efforts of independent agents and brokers can also provide a competitive advantage.

All rates charged by private passenger automobile insurers in California are subject to the prior approval of the California DOI.  See “Regulation—Department of Insurance Oversight.”

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

Reinsurance

The Company has reinsurance through the Florida Hurricane Catastrophe Trust Fund (“FHCF”) that provides coverage equal to approximately 90 percent of $47 million in excess of $10 million per occurrence based on the latest information provided by FHCF.  The coverage is expected to change when new information is available later in 2009.

For California homeowners policies, the Company has reduced its catastrophe exposure from earthquakes by placing earthquake risks with the California Earthquake Authority (the “CEA”).  See “Regulation—Insurance Assessments.”  Although the Company’s catastrophe exposure to earthquakes has been reduced, the Company continues to have catastrophe exposure to fires following an earthquake.

The Company carries a commercial umbrella reinsurance treaty and seeks facultative arrangements for large property risks. In addition, the Company has other reinsurance in force that is not material to the consolidated financial statements. If any reinsurers are unable to perform their obligations under a reinsurance treaty, the Company will be required, as primary insurer, to discharge all obligations to its insured in their entirety.

Regulation

The Company is subject to significant regulation and supervision by the DOI of each state in which the Company operates.

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Department of Insurance Oversight

The powers of the DOI in each state primarily include the prior approval of insurance rates and rating factors, the establishment of capital and surplus requirements and solvency standards, and restrictions on dividend payments and transactions with affiliates.  DOI regulations and supervision are designed principally to benefit policyholders rather than shareholders.

California Proposition 103 requires that property and casualty insurance rates be approved by the California DOI 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 specifies 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 California DOI to have a substantial relationship to risk of loss and are adopted by regulation.  The statute further provides 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’s rate plan was approved by the California DOI and operates under these rating factor regulations.

Insurance rates in Georgia, New York, New Jersey, Pennsylvania and Nevada require prior approval from the state DOI, while insurance rates in Illinois, Texas, Virginia, Arizona and Michigan must only be filed with the respective DOI before they are implemented.  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 DOI in each state in which the Company operates is responsible for conducting periodic financial and market conduct examinations of insurance companies domiciled in their states.

Market conduct examinations typically review compliance with insurance statutes and regulations with respect to rating, underwriting, claims handling, billing and other practices.

The following table provides a summary of current financial and market conduct examinations:

State	Exam Type	Period Under Review	Status
CA	Financial	2004 to 2007	Report was issued in January 2009
CA	Rating & Underwriting	2004 to 2006	Field work has been completed. Awaiting final report.
NJ	Market Conduct	Sept 2007 to Aug 2008	Fieldwork began in November 2008
GA	Financial	2004 to 2006	Report was issued in October 2008
OK	Financial	2005 to 2007	Fieldwork began in October 2008
IL	Market Conduct	2007	Report was issued in August 2008

No material findings have been noted in any of these examinations.

For discussion of current regulatory matters in California, see “Regulatory and Legal Matters” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The operations of the Company are dependent on the laws of the states 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 made financial contributions of $354,450 and $463,985 to officeholders and candidates in 2008 and 2007, 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.

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Insurance Assessments

The California Insurance Guarantee Association (“CIGA”) was created to pay claims on behalf of insolvent property and casualty insurers.  Each year, these claims are estimated by CIGA and the Company is assessed for its pro-rata share based on prior year California premiums written in the particular line.  These assessments are limited to 2% of premiums written in the preceding year and are recouped through a mandated surcharge to policyholders the year after the assessment.  The Insurance Companies in other states are also subject to the provisions of similar insurance guaranty associations.

During 2008, the Company paid approximately $1.9 million in assessments to the New Jersey Unsatisfied Claim and Judgment Fund and the New Jersey Property-Liability Insurance Guaranty Association for assessments relating to its personal automobile line of business.  As permitted by state law, the New Jersey assessments paid during 2008 are recoupable through a surcharge to policyholders.  During 2008, the Company continued to recoup these assessments and will continue recouping them in 2009.  It is possible that there will be additional assessments in 2009.  Under GAAP, these recoverable assessments of $5.2 million have been expensed as other operating expenses in the consolidated statements of operations.

The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowners policy through the CEA.  The Company receives a small fee for placing business with the CEA, which was recorded as other income in the consolidated statements of operations.

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 26, 2008, was approximately $74 million.

Holding Company Act

The California Companies are subject to California DOI regulation pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the “Holding Company Act”).  The California DOI may examine the affairs of each of the California Companies at any time.  The Holding Company Act requires disclosure of any material transactions among affiliates within a Holding Company System.  Certain transactions and dividends defined to be of an “extraordinary” type may not be affected if the California DOI disapproves the transaction within 30 days after notice.  Such transactions include, but are not limited to, extraordinary dividends; management agreements, service contracts, and cost-sharing arrangements; all guarantees that are not quantifiable; derivative transactions or series of derivative transactions; certain reinsurance transactions or modifications thereof in which the reinsurance premium or a change in the insurer’s liabilities equals or exceeds 5 percent of the insurer’s policyholders’ surplus as of the preceding December 31; sales, purchases, exchanges, loans and extensions of credit; and investments, in the net aggregate, involving more than the lesser of 3% of the respective California Company’s admitted assets or 25% of statutory surplus as regards 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 statutory policyholders’ surplus as of the preceding December 31 or the insurance company’s statutory 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.  There are similar limitations imposed by other states on the Insurance Companies’ ability to pay dividends.  As of December 31, 2008, the Insurance Companies are permitted to pay, without extraordinary DOI approval, $136.7 million in dividends, of which $115.7 million is payable from the California Companies.

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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 California DOI.  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 California DOIan 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.

Each of the Insurance Companies is subject to holding company regulations in the states in which it is domiciled; the provisions of which are substantially similar to those of the Holding Company Act.

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.  In 2008, assigned risks represented less than 0.1% of total automobile direct premiums written and less than 0.1% of total automobile direct premium earned.  The Company attributes the low level of assignments to the competitive voluntary market.  Many of the other states in which the Company conducts business offer programs similar to that of California.  These programs are not a significant contributor to the business written in those states.

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EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information concerning the executive officers of the Company as of February 15, 2009:

Name	Age		Position
George Joseph		87	Chairman of the Board
Gabriel Tirador		44	President and Chief Executive Officer
Allan Lubitz		50	Senior Vice President and Chief Information Officer
Joanna Y. Moore		53	Senior Vice President and Chief Claims Officer
Bruce E. Norman		60	Senior Vice President - Marketing
John Sutton		61	Senior Vice President - Customer Service
Ronald Deep		53	Vice President -South East Region
Christopher Graves		43	Vice President and Chief Investment Officer
Robert Houlihan		52	Vice President and Chief Product Officer
Kenneth G. Kitzmiller		62	Vice President - Underwriting
Theodore R. Stalick		45	Vice President and Chief Financial Officer
Charles Toney		47	Vice President and Chief Actuary
Judy A. Walters		62	Vice President - Corporate Affairs and Secretary

Mr. Joseph, Chairman of the Board of Directors, has served in this capacity since 1961. He held the position of Chief Executive Officer of the Company for 45 years from 1961 through December 2006.  Mr. Joseph has more than 50 years’ experience in the property and casualty insurance business.

Mr. Tirador, President and Chief Executive Officer, served as the Company’s assistant controller from 1994 to 1996.  In 1997 and 1998 he served as the Vice President and Controller of the Automobile Club of Southern California.  He rejoined the Company in 1998 as Vice President and Chief Financial Officer.  He was appointed President and Chief Operating Officer in October 2001 and Chief Executive Officer in January 2007.  Mr. Tirador has over 20 years experience in the property and casualty insurance industry and is a Certified Public Accountant.

Mr. Lubitz, Senior Vice President and Chief Information Officer, joined the Company in January 2008.  Prior to joining the Company, he served as Senior Vice President and Chief Information Officer of Option One Mortgage from 2003 to 2007 and President of ANR Consulting Group from 2000 to 2003. Prior to 2000, he held various management positions at First American Corporation over a 20 year period, most recently as Senior Vice President and Chief Information Officer.

Ms. Moore, Senior Vice President and Chief Claims Officer, joined the Company in the claims department in 1981.  She was named Vice President of Claims of Mercury General in 1991 and Vice President and Chief Claims Officer in 1995.  She was promoted to Senior Vice President and Chief Claims Officer on January 1, 2007.

Mr. Norman, Senior Vice President-Marketing, has been employed by the Company since 1971.  Mr. Norman was named to his current position in 1999, and has been a Vice President since 1985 and a Vice President of MCC since 1983.  Mr. Norman has supervised the selection and training of agents and managed relations between agents and the Company since 1977.

Mr. Sutton, Senior Vice President-Customer Service, joined the Company as Assistant to CEO in July 2000.  He was named Vice President in September 2007 and Senior Vice President in January 2008. Prior to joining the Company, he served as President and Chief Executive Officer of The Covenant Group from 1994 to 2000. Prior to 1994, he held various executive positions at Hanover Insurance Company.

Mr. Deep, Vice President-South East Region, joined the Company in September 2006 as State Administrator for the South East Region and was named Vice President of the South East Region in February 2007.  Prior to joining the Company, Mr. Deep was Executive Vice President of Shelby Insurance Company from 2004 to 2006 and an Assistant Vice President of USAA from 1994 to 2004.

Mr. Graves, Vice President and Chief Investment Officer, has been employed by the Company in the investment department since 1986.  Mr. Graves was appointed Chief Investment Officer in 1998, and named Vice President in April 2001.

Mr. Houlihan, Vice President and Chief Product Officer, joined the Company in December 2007.  Prior to joining the Company, he served as Senior Product Manager at Bristol West Insurance Group from 2005 to 2007 and Product Manager at Progressive Insurance Company from 1999 to 2005.

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

Mr. Stalick, Vice President and Chief Financial Officer, joined the Company as Corporate Controller in 1997.  In October 2000, he was named Chief Accounting Officer, a role he held until appointed to his current position in October 2001.  Mr. Stalick is a Certified Public Accountant.

Mr. Toney, Vice President and Chief Actuary, joined the Company in 1984 as a programmer/analyst.  In 1994 he earned his Fellowship in the Casualty Actuarial Society and was appointed to his current position.

Ms. Walters, Vice President-Corporate Affairs and Secretary, 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 1998.

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Item 1A. Risk Factors

The Company’s business involves various risks and uncertainties, some of which are discussed in this section.  The information discussed below should be considered carefully with the other information contained in this Annual Report on Form 10-K and the other documents and materials filed by the Company with the SEC, as well as news releases and other information publicly disseminated by the Company from time to time.

The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company, or that it currently believes to be immaterial, may also adversely affect the Company’s business. Any of the following risks or uncertainties that develop into actual events could have a materially adverse effect on the Company’s business, financial condition or results of operations.

Risks Related to the Company and its Business

The Company is a holding company that relies on regulated subsidiaries for cash to satisfy its obligations.

As a holding company, the Company maintains no operations that generate revenue to pay operating expenses, shareholders’ dividends or principal or interest on its indebtedness. Consequently, the Company relies on the ability of its insurance subsidiaries, and particularly its California insurance subsidiaries, to pay dividends for the Company to meet its debt payment obligations and pay other expenses. The ability of the Company’s insurance subsidiaries to pay dividends is regulated by state insurance laws, which limit the amount of, and in certain circumstances may prohibit the payment of, cash dividends. Generally, these insurance regulations permit the payment of dividends only out of earned surplus in any year which, together with other dividends or distributions made within the preceding 12 months, do not exceed the greater of 10% of statutory surplus as of the end of the preceding year or the net income for the preceding year, with larger dividends payable only after receipt of prior regulatory approval. The inability of the Company’s insurance subsidiaries to pay dividends in an amount sufficient to enable the Company to meet its cash requirements at the holding company level could have a material adverse effect on the Company’s results of operations and its ability to pay dividends to its shareholders.

If the Company’s loss reserves are inadequate, its business and financial position could be harmed.

The process of establishing property and liability loss reserves is inherently uncertain due to a number of factors, including underwriting quality, the frequency and amount of covered losses, variations in claims settlement practices, the costs and uncertainty of litigation, and expanding theories of liability. While the Company believes that improved actuarial techniques and databases have assisted in estimating loss reserves, the Company’s methods may prove to be inadequate. If any of these contingencies, many of which are beyond the Company’s control, results in loss reserves that are not sufficient to cover its actual losses, its results of operations, liquidity and financial position may be materially adversely affected.

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The Company’s success depends on its ability to accurately underwrite risks and to charge adequate premiums to policyholders.

The Company’s financial condition, liquidity and results of operations depend on the Company’s ability to underwrite and set premiums accurately for the risks it faces. Premium rate adequacy is necessary to generate sufficient premium to offset losses, loss adjustment expenses and underwriting expenses and to earn a profit. In order to price its products accurately, the Company must collect and properly analyze a substantial volume of data; develop, test and apply appropriate rating formulae; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. The Company’s ability to undertake these efforts successfully, and as a result, price accurately, is subject to a number of risks and uncertainties, including, without limitation:

• availability of sufficient reliable data;

•  incorrect or incomplete analysis of available data;

• uncertainties inherent in estimates and assumptions, generally;

• selection and application of appropriate rating formulae or other pricing methodologies;

• successful innovation of new pricing strategies;

• recognition of changes in trends and in the projected severity and frequency of losses;

• the Company’s ability to forecast renewals of existing policies accurately;

• unanticipated court decisions, legislation or regulatory action;

• ongoing changes in the Company’s claim settlement practices;

• changes in operating expenses;

• changing driving patterns;

• extra-contractual liability arising from bad faith claims;

• weather catastrophes;

• unexpected medical inflation; and

• unanticipated inflation in auto repair costs, auto parts prices and used car prices.

Such risks may result in the Company’s pricing being based on outdated, inadequate or inaccurate data or inappropriate analyses, assumptions or methodologies, and may cause the Company to estimate incorrectly future changes in the frequency or severity of claims. As a result, the Company could underprice risks, which would negatively affect the Company’s margins, or it could overprice risks, which could reduce the Company’s volume and competitiveness. In either event, the Company’s operating results, financial condition and cash flow could be materially adversely affected.

The effects of emerging claim and coverage issues on the Company’s business are uncertain and may have an adverse effect on the Company’s business.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect the Company’s business by either extending coverage beyond its underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after the Company has issued insurance policies that are affected by the changes. As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued.

18

The Company’s private passenger insurance rates are subject to prior approval by the departments of insurance in most of the states in which the Company operates, and to political influences.

In most of the states in which the Company operates, it must obtain prior approval from the state department of insurance of the private passenger insurance rates charged to its customers, including any increases in those rates. If the Company is unable to receive approval of the rate increases it requests, the Company’s ability to operate its business in a profitable manner may be limited and its liquidity, financial condition and results of operations may be adversely affected.

From time to time, the private passenger auto insurance industry comes under pressure from state regulators, legislators and special interest groups to reduce, freeze or set rates at levels that do not correspond with underlying costs, in the opinion of the Company’s management. The homeowners insurance business faces similar pressure, particularly as regulators in catastrophe-prone states seek an acceptable methodology to price for catastrophe exposure. In addition, various insurance underwriting and pricing criteria regularly come under attack by regulators, legislators and special interest groups. The result could be legislation or regulations that would adversely affect the Company’s business, financial condition and results of operations.

The Company remains highly dependent upon California and several other key states to produce revenues and operating profits.

For the year ended December 31, 2008, the Company generated approximately 79.4% of its direct automobile insurance premiums written in California, 6.7% in Florida and 3.5% in New Jersey.  The Company’s financial results are therefore subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in these states and changes in any of these conditions could negatively impact the Company’s results of operations.

Acquired companies can be difficult to integrate, disrupt the Company’s business and adversely affect its operating results. The benefits anticipated in an acquisition may not be realized in the manner anticipated.

Effective January 1, 2009, the Company acquired all of the issued and outstanding membership interests of AIS Management, LLC, which is the parent company of Auto Insurance Specialists, LLC, and PoliSeek AIS Insurance Solutions, Inc. with the expectation that the acquisition would result in various benefits including, among other things, enhanced revenue and profits, greater market presence and development, and enhancements to the Company’s product portfolio and customer base.  These benefits may not be realized as rapidly as, or to the extent, anticipated by the Company.  Costs incurred in the integration of the AIS operations with the Company’s operations also could have an adverse effect on the Company’s business, financial condition and operating results. If these risks materialize, the Company’s stock price could be materially adversely affected. The acquisition of AIS, as with all acquisitions, involves numerous risks, including:

• difficulties in integrating AIS operations, technologies, services and personnel;

• potential loss of AIS customers;

• diversion of financial and management resources from existing operations;

• potential loss of key AIS employees;

• integrating personnel with diverse business and cultural backgrounds;

• preserving AIS’s important industry, marketing and customer relationships;

• assumption of liabilities held by AIS; and

• inability to generate sufficient revenue and cost savings to offset the cost of the acquisition.

The Company’s acquisition of AIS may also cause it to:

• assume and otherwise become subject to certain liabilities;

• incur additional debt, such as the $120 million debt incurred to fund the acquisition;

• make write-offs and incur restructuring and other related expenses; and

• create goodwill or other intangible assets that could result in significant impairment charges and/or amortization expense.

As a result, if the Company fails to properly evaluate, execute the acquisition of and integrate AIS, its business and prospects may be seriously harmed.

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If the Company cannot maintain its A.M. Best ratings, it may not be able to maintain premium volume in its insurance operations sufficient to attain the Company’s financial performance goals.

The Company’s ability to retain its existing business or to attract new business in its insurance operations is affected by its rating by A.M. Best Company. A.M. Best Company currently rates all of the Company’s insurance subsidiaries with sufficient operating history to be rated as either A+ (Superior) or A- (Excellent).  If the Company is unable to maintain its A.M. Best ratings, the Company may not be able to grow its premium volume sufficiently to attain its financial performance goals, and if A.M. Best were to downgrade the Company’s rating, the Company could lose significant premium volume.

The Company’s ability to access capital markets, its financing arrangements, and its business operations are dependent on favorable evaluations and ratings by credit and other rating agencies.

Financial strength and claims-paying ability ratings issued by firms such as Standard & Poor’s, Fitch, and Moody’s have become an increasingly important factor in establishing the competitive position of insurance companies. The Company’s ability to attract and retain policies is affected by its ratings with these agencies. Rating agencies assign ratings based upon their evaluations of an insurance company’s ability to meet its financial obligations.  The Company’s financial strength ratings with Standard & Poor’s, Fitch, and Moody’s are AA-, AA-, and Aa3, respectively; its respective debt ratings are A-, A, and A3.  In February, 2009, the ratings were affirmed by Standard & Poor’s and Fitch, but the outlook for the ratings was changed from stable to negative while Moody’s maintained a stable outlook.  Since these ratings are subject to continuous review, the Company cannot guarantee the continuation of the favorable ratings. If the ratings were lowered significantly by any one of these agencies relative to those of the Company’s competitors, its ability to market products to new customers and to renew the policies of current customers could be harmed. A lowering of the ratings could also limit the Company’s access to the capital markets or adversely affect pricing of new debt sought in the capital markets. These events, in turn, could have a material adverse effect on the Company’s net income and liquidity.

The Company’s insurance subsidiaries are subject to minimum capital and surplus requirements, and any failure to meet these requirements could subject the Company’s insurance subsidiaries to regulatory action.

The Company’s insurance subsidiaries are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital Model Act adopted by the National Association of Insurance Commissioners, or NAIC, require the Company’s insurance subsidiaries to report their results of risk-based capital calculations to state departments of insurance and the NAIC. If any of the Company’s insurance subsidiaries fails to meet these standards and requirements, the Department of Insurance regulating such subsidiary may require specified actions by the subsidiary.

There is uncertainty involved in the availability of reinsurance and the collectibility of reinsurance recoverables.

The Company reinsures a portion of its potential losses on the policies it issues to mitigate the volatility of the losses on its financial condition and results of operations. The availability and cost of reinsurance is subject to market conditions, which are outside of the Company’s control. From time to time, market conditions have limited, and in some cases prevented, insurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. As a result, the Company may not be able to successfully purchase reinsurance and transfer a portion of the Company’s risk through reinsurance arrangements. In addition, as is customary, the Company initially pays all claims and seeks to recover the reinsured losses from its reinsurers. Although the Company reports as assets the amount of claims paid which the Company expects to recover from reinsurers, no assurance can be given that the Company will be able to collect from its reinsurers. If the amounts actually recoverable under the Company’s reinsurance treaties are ultimately determined to be less than the amount it has reported as recoverable, the Company may incur a loss during the period in which that determination is made.

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The Company depends on independent agents who may discontinue sales of its policies at any time.

The Company sells its insurance policies through approximately 4,700 independent agents and brokers.  The Company must compete with other insurance carriers for these agents’ and brokers’ business.  Some competitors offer a larger variety of products, lower prices for insurance coverage, higher commissions, or more attractive non-cash incentives.  To maintain its relationship with these independent agents, the Company must pay competitive commissions, be able to respond to their needs quickly and adequately, and create a consistently high level of customer satisfaction. If these independent agents find it preferable to do business with the Company’s competitors, it would be difficult to renew the Company’s existing business or attract new business. State regulations may also limit the manner in which the Company’s producers are compensated or incentivized. Such developments could negatively impact the Company’s relationship with these parties and ultimately reduce revenues.

Changes in market interest rates or defaults may have an adverse effect on the Company’s investment portfolio, which may adversely affect the Company’s financial results.

The Company’s results are affected, in part, by the performance of its investment portfolio. The Company’s investment portfolio contains interest rate sensitive-investments, such as municipal and corporate bonds. Increases in market interest rates may have an adverse impact on the value of the investment portfolio by decreasing unrealized capital gains on fixed income securities. Declining market interest rates could have an adverse impact on the Company’s investment income as it invests positive cash flows from operations and as it reinvests proceeds from maturing and called investments in new investments that could yield lower rates than the Company’s investments have historically generated. Defaults in the Company’s investment portfolio may produce operating losses and reduce the Company’s capital and surplus.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond the Company’s control. Although the Company takes measures to manage the risks of investing in a changing interest rate environment, it may not be able to mitigate interest rate sensitivity effectively. The Company’s mitigation efforts include maintaining a high quality portfolio and managing the duration of the portfolio to reduce the effect of interest rate changes on book value. Despite its mitigation efforts, a significant increase in interest rates could have a material adverse effect on the Company’s book value.

Changes in the financial strength ratings of financial guaranty insurers issuing policies on bonds held in the Company’s investment portfolio may have an adverse effect on the Company’s investment results.

In an effort to enhance the bond rating applicable to a certain bond issues, some bond issuers purchase municipal bond insurance policies from private insurers. The insurance generally guarantees the payment of principal and interest on a bond issue if the issuer defaults. By purchasing the insurance, the financial strength ratings applicable to the bonds are based on the credit worthiness of the insurer rather than the underlying credit of the bond issuer. Several financial guaranty insurers that have issued insurance policies covering bonds held by the Company are facing financial strength rating downgrades due to risk exposures on insurance policies that guarantee mortgage debt and related structured products.  These financial guaranty insurers are subject to DOI oversight.  As the financial strength ratings of these insurers are reduced, the ratings of the insured bond issues correspondingly decrease.  Although the Company has determined that the financial strength rating of the underlying bond issues in its investment portfolio are within the Company’s investment policy without the enhancement provided by the insurance policies, any further downgrades in the financial strength ratings of these insurance companies or any defaults on the insurance policies written by these insurance companies may reduce the fair value of the underlying bond issues and the Company’s investment portfolio or may reduce the investment results generated by the Company’s investment portfolio, which could have a material adverse effect on the Company’s financial condition, liquidity and results of operations.

21

The Company’s business is vulnerable to significant catastrophic property loss, which could have an adverse effect on its results of operations.

The Company faces a significant risk of loss in the ordinary course of its business for property damage resulting from natural disasters, man-made catastrophes and other catastrophic events, particularly hurricanes, earthquakes, hail storms, explosions, tropical storms, fires, war, acts of terrorism, severe winter weather and other natural and man-made disasters. Such events typically increase the frequency and severity of automobile and other property claims.  Because catastrophic loss events are by their nature unpredictable, historical results of operations may not be indicative of future results of operations, and the occurrence of claims from catastrophic events is likely to result in substantial volatility in the Company’s financial condition and results of operations from period to period. Although the Company attempts to manage its exposure to such events, the occurrence of one or more major catastrophes in any given period could have a material and adverse impact on the Company’s financial condition and results of operations and could result in substantial outflows of cash as losses are paid.

The Company’s expansion plans may adversely affect its future profitability.

The Company is currently expanding and intends to further expand its operations in several of the states in which the Company has operations and into states in which it has not yet begun operations. The intended expansion will necessitate increased expenditures. The Company expects to fund these expenditures out of cash flow from operations. The expansion may not occur, or if it does occur may not be successful in providing increased revenues or profitability. If the Company’s cash flow from operations is insufficient to cover the increased costs of the expansion, or if the expansion does not provide the benefits anticipated, the Company’s financial condition and results of operations and ability to grow its business may be harmed.

The Company may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

The Company’s future capital requirements depend on many factors, including its ability to write new business successfully, its ability to establish premium rates and reserves at levels sufficient to cover losses, the success of its current expansion plans and the performance of its investment portfolio. The Company may need to raise additional funds through equity or debt financing, sales of all or a portion of its investment portfolio or curtail its growth and reduce its assets. Any equity or debt financing, if available at all, may not be available on terms that are favorable to the Company.  In the case of equity financing, the Company’s shareholders could experience dilution.  In addition, such securities may have rights, preferences and privileges that are senior to those of the Company’s current shareholders. If the Company cannot obtain adequate capital on favorable terms or at all, its business, operating results and financial condition could be adversely affected.

Any inability of the Company to realize its deferred tax assets may have a material adverse affect on the Company’s results of operations and its financial condition.

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits.  The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability and capital gain generation. Although management believes that it is more likely than not that that the deferred tax assets will be realized, some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable capital gains in the future sufficient to utilize them or the Company enters into one or more transactions that limit its right to realize all of the deferred tax assets.

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If the Company determines that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce the deferred tax asset through a charge to earnings in the period in which the determination is made. This charge could have a material adverse affect on the Company’s results of operations and financial condition. In addition, the assumptions used to make this determination are subject to change from period to period based on changes in tax laws or variances between the Company’s future projected operating performance and actual results. As a result, significant management judgment is required in assessing the possible need for a deferred tax asset valuation allowance. For these reasons and because changes in these assumptions and estimates can materially affect the Company’s results of operations and financial condition, management has included the assessment of a deferred tax asset valuation allowance as a critical accounting estimate.

Continued deterioration of the municipal bond market in general or of specific municipal bonds held by the Company may result in a material adverse affect on the Company’s results of operations and its financial condition.

At December 31, 2008, approximately 74% of the Company’s total investment portfolio at fair value and 88% of its total fixed maturity investments at fair value were invested in tax-exempt municipal bonds.  Approximately 45% of the net losses held in the Company’s investment portfolio at December 31, 2008 related to the Company’s municipal bond holdings. With such a large percentage of the Company’s investment portfolio invested in municipal bonds, the performance of the Company’s investment portfolio, including the cash flows generated by the investment portfolio is significantly dependent on the performance of municipal bonds.  If the value of municipal bond markets in general or any of the Company’s municipal bond holdings continue to deteriorate, the performance of the Company’s investment portfolio, results of operations, financial position and cash flows may be materially and adversely affected.

The Company relies on its information technology systems to manage many aspects of its business, and any failure of these systems to function properly or any interruption in their operation could result in a material adverse effect on the Company’s business, financial condition and results of operations.

The Company depends on the accuracy, reliability and proper functioning of its information technology systems. The Company relies on these information technology systems to effectively manage many aspects of its business, including underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, and to maintain its policyholder data.  The Company is developing and deploying new information technology systems that are designed to manage many of these functions across all of the states in which it operates and all of the lines of insurance it offers. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Technology.”  The failure of hardware or software that supports the Company’s information technology systems, the loss of data contained in the systems, or any delay or failure in the full deployment of the Company’s new information technology systems could disrupt its business and could result in decreased premiums, increased overhead costs and inaccurate reporting, all of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

In addition, despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for the Company’s information technology systems, these systems are vulnerable to damage or interruption from:

• earthquake, fire, flood and other natural disasters;

• terrorist attacks and attacks by computer viruses or hackers;

• power loss;

• unauthorized access; and

• computer systems, Internet, telecommunications or data network failure.

It is possible that a system failure, accident or security breach could result in a material disruption to the Company’s business. In addition, substantial costs may be incurred to remedy the damages caused by these disruptions. Following implementation of its new information technology systems, the Company may from time to time install new or upgraded business management systems. To the extent that a critical system fails or is not properly implemented and the failure cannot be corrected in a timely manner, the Company may experience disruptions to the business that could have a material adverse effect on the Company’s results of operations.

23

Changes in accounting standards issued by the FASB or other standard-setting bodies may adversely affect the Company’s consolidated financial statements.

The Company’s consolidated financial statements are subject to the application of GAAP, which is periodically revised and/or expanded. Accordingly, the Company is required to adopt new or revised accounting standards from time to time issued by recognized authoritative bodies, including the FASB. It is possible that future changes the Company is required to adopt could change the current accounting treatment that the Company applies to its consolidated financial statements and that such changes could have a material adverse effect on the Company’s results and financial condition. See Note 1 of Notes to Consolidated Financial Statements.

The Company’s disclosure controls and procedures may not prevent or detect all acts of fraud.

The Company’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and the Company cannot assure that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on the Company’s stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the SEC require the Company to include in its Form 10-K a report by its management regarding the effectiveness of the Company’s internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of the Company’s internal control over financial reporting as of the end of its fiscal year, including a statement as to whether or not the Company’s internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in the Company’s internal control over financial reporting identified by management. Areas of the Company’s internal control over financial reporting may require improvement from time to time. If management is unable to assert that the Company’s internal control over financial reporting is effective now or in any future period, or if the Company’s independent auditors are unable to express an opinion on the effectiveness of those internal controls, investors may lose confidence in the accuracy and completeness of the Company’s financial reports, which could have an adverse effect on its stock price.

The Company may be required to adopt International Financial Reporting Standards (IFRS). The ultimate adoption of such standards could negatively impact its business, financial condition or results of operations.

Although not yet required, the Company could be required to adopt IFRS, which is different than U.S. GAAP, for the Company’s accounting and reporting standards.  The implementation and adoption of new standards could favorably or unfavorably impact the Company’s business, financial condition or results of operations.

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The ability of the Company to attract, develop and retain talented employees, managers and executives, and to maintain appropriate staffing levels, is critical to the Company’s success.

As the Company expands its operations, it must hire and train new employees, and retain current employees to handle the resulting increase in new inquiries, policies, customers and claims. The failure of the Company to successfully hire and retain a sufficient number of skilled employees could result in the Company having to slow the growth of its business in some jurisdictions. It could also affect the Company’s ability to develop and deploy information technology systems that are important to the success of the Company. In addition, the failure to adequately staff its claims and underwriting departments could result in decreased quality of the Company’s claims and underwriting operations.

The Company’s success also depends heavily upon the continued contributions of its executive officers, both individually and as a group. The Company’s future performance will be substantially dependent on its ability to retain and motivate its management team. The loss of the services of any of the Company’s executive officers could prevent the Company from successfully implementing its business strategy, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The insurance industry has been the target of litigation, and the Company faces litigation risks which, if decided adversely to the Company, could impact its financial results.

In recent years, insurance companies have been named as defendants in lawsuits including class actions, relating to pricing, sales practices and practices in claims handling, among other matters. A number of these lawsuits have resulted in substantial jury awards or settlements involving other insurers. Future litigation relating to these or other business practices may negatively affect the Company by requiring it to pay substantial awards or settlements, increasing the Company’s legal costs, diverting management attention from other business issues or harming the Company’s reputation with customers. Such litigation is inherently unpredictable.

The Company and its insurance subsidiaries are named as defendants in a number of lawsuits. These lawsuits are described more fully in “Item 3. Legal Proceedings.”  Litigation, by its very nature, is unpredictable and the outcome of these cases is uncertain. The precise nature of the relief that may be sought or granted in any lawsuits is uncertain and may, if these lawsuits are determined adversely to the Company, negatively impact the manner in which the Company conducts its business and its results of operations, which could materially increase the Company’s costs and expenses.

In addition, potential litigation involving new claim, coverage and business practice issues could adversely affect the Company’s business by changing the way policies are priced, extending coverage beyond its underwriting intent or increasing the size of claims. The effects of these and other unforeseen emerging claim, coverage and business practice issues could negatively impact the Company’s financial condition, revenues or its methods of doing business.

The failure of any of the loss limitation methods employed by the Company could have a material adverse effect on its financial condition or results of operations.

Various provisions of the Company’s policies, such as limitations or exclusions from coverage which are intended to limit the Company’s risks, may not be enforceable in the manner the Company intends.  In addition, the Company’s policies contain conditions requiring the prompt reporting of claims and the Company’s right to decline coverage in the event of a violation of that condition. While the Company’s insurance product exclusions and limitations reduce the Company’s loss exposure and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would adversely affect the Company’s loss experience, which could have a material adverse effect on its financial condition or results of operations.

25

General economic conditions may affect the Company’s revenue and profitability and harm its business.

Financial markets in the United States, Europe and Asia have experienced and continue to experience extreme disruption in recent months, and the United States and other countries are currently in a severe economic recession. Unfavorable changes in economic conditions, including continuing stock market declines, inflation, recession, declining consumer confidence or other changes, may reduce the Company’s premium volume through policy cancellations, modifications or non-renewals, may reduce cash flows from operations and investments, may harm the Company’s financial position and may reduce the Insurance Companies’ statutory surplus.  Challenging economic conditions also may impair the ability of the Company’s customers to pay premiums as they fall due, and as a result, the Company’s reserves and write-offs could increase. The significant losses in the Company’s investment portfolio could also continue if the losses in the financial markets in general continue.  The Company is unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the United States and other countries.  If economic conditions in the United States continue to deteriorate or do not show improvement, the adverse impact on the Company’s results of operations, financial position and cash flows may continue.

Continued deterioration in the public debt and equity markets could lead to additional investment losses and materially and adversely affect the Company’s business.

The prolonged and severe disruptions in the public debt and equity markets, including among other things, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions, have resulted in significant losses in the Company’s investment portfolio. For the year ended December 31, 2008, the Company incurred substantial realized investment losses, as described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I.  Continued deterioration in the financial markets could lead to additional investment losses.

Funding for the Company’s future growth may depend upon obtaining new financing, which may be difficult to obtain given prevalent economic conditions and the general credit crisis.

To accommodate the Company’s expected future growth, the Company may require funding in addition to cash provided from current operations.  The Company’s ability to obtain financing may be constrained by current economic conditions affecting global financial markets.  Specifically, the recent credit crisis and other related trends affecting the banking industry have caused significant operating losses and bankruptcies throughout the banking industry. Many lenders and institutional investors have ceased funding even the most credit-worthy borrowers. If the Company is unable to obtain necessary financing, it may be unable to take advantage of opportunities with potential business partners or new products or to otherwise expand its business as planned.

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Risks Related to the Company’s Industry

The private passenger automobile insurance business is highly competitive, and the Company may not be able to compete effectively against larger, better-capitalized companies.

The Company competes with many property and casualty insurance companies selling private passenger automobile insurance in the states in which the Company operates, many of which are better capitalized than the Company and have higher A.M. Best ratings. The superior capitalization of many of the Company’s competitors may enable them to offer lower rates, to withstand larger losses, and to take advantage more effectively of new marketing opportunities. The Company’s competition may also become increasingly better capitalized in the future as the traditional barriers between insurance companies and banks and other financial institutions erode and as the property and casualty industry continues to consolidate. The Company’s ability to compete against these larger, better-capitalized competitors depends importantly on its ability to deliver superior service and its strong relationships with independent agents.

The Company may from time to time undertake strategic marketing and operating initiatives to improve its competitive position and drive growth. If the Company is unable to successfully implement new strategic initiatives or if the Company’s marketing campaigns do not attract new customers, the Company’s competitive position may be harmed, which could adversely affect the Company’s business and results of operations.

Additionally, in a highly competitive industry such as the automobile insurance industry, some of the Company’s competitors may fail from time to time. In the event of a failure of a major insurance company, the Company could be adversely affected, as the Company and other insurance companies would likely be required by state law to absorb the losses of the failed insurer, and as the Company would be faced with an unexpected surge in new business from the failed insurer’s former policyholders.

The Company may be adversely affected by changes in the personal automobile insurance business.

Approximately 83.7% of the Company’s direct written premiums for the year ended December 31, 2008 were generated from personal automobile insurance policies. Adverse developments in the market for personal automobile insurance, or the personal automobile insurance industry in general, whether related to changes in competition, pricing or regulations, could cause the Company’s results of operations to suffer. This industry is also exposed to the risks of severe weather conditions, such as rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, earthquakes and, to a lesser degree, explosions, terrorist attacks and riots. The automobile insurance business is also affected by cost trends that impact profitability. Factors which negatively affect cost trends include inflation in automobile repair costs, automobile parts costs, used car prices and medical care. Increased litigation of claims, particularly those involving allegations of bad faith or seeking extra contractual and punitive damages, may also adversely affect loss costs.

27

The insurance industry is subject to extensive regulation, which may affect the Company’s ability to execute its business plan and grow its business.

The Company is subject to comprehensive regulation and supervision by government agencies in each of the states in which its insurance subsidiaries is domiciled, as well as in the states where its insurance subsidiaries sell insurance products, issue policies and handle claims. Some states impose restrictions or require prior regulatory approval of specific corporate actions, which may adversely affect the Company’s ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow its business profitably. These regulations provide safeguards for policyholders and are not intended to protect the interests of shareholders. The Company’s ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to its success. Some of these regulations include:

Required Licensing. The Company operates under licenses issued by the Departments of Insurance in the states in which the Company sells insurance. If a regulatory authority denies or delays granting a new license, the Company’s ability to enter that market quickly or offer new insurance products in that market may be substantially impaired. Also, if the Department of Insurance in any state in which the Company currently operates suspends, non-renews, or revokes an existing license, the Company would not be able to offer affected products in the state.

Transactions Between Insurance Companies and Their Affiliates. Transactions between the Company’s insurance subsidiaries and their affiliates (including the Company) generally must be disclosed to state regulators, and prior approval of the applicable regulator generally is required before any material or extraordinary transaction may be consummated. State regulators may refuse to approve or delay approval of some transactions, which may adversely affect the Company’s ability to innovate or operate efficiently.

Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which the Company conducts business require insurance companies to file insurance rate schedules and insurance policy forms for review and approval. If, as permitted in some states, the Company begins using new rates before they are approved, it may be required to issue refunds or credits to the Company’s policyholders if the new rates are ultimately deemed excessive or unfair and disapproved by the applicable state regulator. Accordingly, the Company’s ability to respond to market developments or increased costs in that state can be adversely affected.

Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company operates have laws and regulations that limit its ability to exit a market. For example, these states may limit a private passenger auto insurer’s ability to cancel and non-renew policies or they may prohibit the Company from withdrawing one or more lines of insurance business from the state unless prior approval is received from the state insurance department. In some states, these regulations extend to significant reductions in the amount of insurance written, not just to a complete withdrawal. Laws and regulations that limit the Company’s ability to cancel and non-renew policies in some states or locations and that subject withdrawal plans to prior approval requirements may restrict the Company’s ability to exit unprofitable markets, which may harm its business and results of operations.

Other Regulations. The Company must also comply with regulations involving, among other things:

• the use of non-public consumer information and related privacy issues;

• the use of credit history in underwriting and rating;

• limitations on the ability to charge policy fees;

• limitations on types and amounts of investments;

• the payment of dividends;

• the acquisition or disposition of an insurance company or of any company controlling an insurance company;

• involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental charges;

• reporting with respect to financial condition;

• periodic financial and market conduct examinations performed by state insurance department examiners; and

• the other regulations discussed in this Annual Report on Form 10-K.

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Compliance with laws and regulations addressing these and other issues often will result in increased administrative costs. In addition, these laws and regulations may limit the Company’s ability to underwrite and price risks accurately, prevent it from obtaining timely rate increases necessary to cover increased costs and may restrict its ability to discontinue unprofitable relationships or exit unprofitable markets. These results, in turn, may adversely affect the Company’s profitability or its ability or desire to grow its business in certain jurisdictions, which could have an adverse effect on the market value of the Company’s common stock. The failure to comply with these laws and regulations may also result in actions by regulators, fines and penalties, and in extreme cases, revocation of the Company’s ability to do business in that jurisdiction. In addition, the Company may face individual and class action lawsuits by insureds and other parties for alleged violations of certain of these laws or regulations.

Regulation may become more extensive in the future, which may adversely affect the Company’s business and results of operations.

No assurance can be given that states will not make existing insurance-related laws and regulations more restrictive in the future or enact new restrictive laws. New or more restrictive regulation in any state in which the Company conducts business could make it more expensive for it to continue to conduct business in these states, restrict the premiums the Company is able to charge or otherwise change the way the Company does business. In such events, the Company may seek to reduce its writings in, or to withdraw entirely from, these states. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Company cannot predict whether and to what extent new laws and regulations that would affect its business will be adopted, the timing of any such adoption and what effects, if any, they may have on the Company’s operations, profitability and financial condition.

Assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds and other mandatory pooling arrangements may reduce the Company’s profitability.

Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies. Many states also have laws that established second-injury funds to provide compensation to injured employees for aggravation of a prior condition or injury which are funded by either assessments based on paid losses or premium surcharge mechanisms. In addition, as a condition to the ability to conduct business in various states, the insurance subsidiaries must participate in mandatory property and casualty shared market mechanisms or pooling arrangements, which provide various types of insurance coverage to individuals or other entities that otherwise are unable to purchase that coverage from private insurers. The effect of these assessments and mandatory shared-market mechanisms or changes in them could reduce the Company’s profitability in any given period or limit its ability to grow its business.

Loss or significant restriction of the use of credit scoring in the pricing and underwriting of personal lines products could reduce the Company’s future profitability.

The Company uses credit scoring as a factor in pricing decisions where allowed by state law. Some consumer groups and regulators have questioned whether the use of credit scoring unfairly discriminates against people with low incomes, minority groups and the elderly and are calling for the prohibition or restriction on the use of credit scoring in underwriting and pricing. Laws or regulations that significantly curtail the use of credit scoring, if enacted in a large number of states, could reduce the Company’s future profitability.

Risks Related to the Company’s Stock

The Company is controlled by a few large shareholders who will be able to exert significant influence over matters requiring shareholder approval, including change of control transactions.

George Joseph and Gloria Joseph collectively own more than 50% of the Company’s common stock. Accordingly, George Joseph and Gloria Joseph have the ability to exert significant influence on the actions the Company may take in the future, including change of control transactions. This concentration of ownership may conflict with the interests of the Company’s other shareholders and the holders of its debt securities.

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Future sales of common stock may affect the market price of the Company’s common stock and the future exercise of options and warrants will result in dilution to the Company’s shareholders.

The Company may raise capital in the future through the issuance and sale of shares of its common stock. The Company cannot predict what effect, if any, such future sales will have on the market price of its common stock. Sales of substantial amounts of its common stock in the public market could adversely affect the market price of the Company’s outstanding common stock, and may make it more difficult for shareholders to sell common stock at a time and price that the shareholder deems appropriate. In addition, the Company has issued options to purchase shares of its common stock. In the event that any options to purchase common stock are exercised, shareholders will suffer dilution in their investment.

Applicable insurance laws may make it difficult to effect a change of control of the Company or the sale of any of its insurance subsidiaries.

Before a person can acquire control of a U.S. insurance company or any holding company of a U.S. insurance company, prior written approval must be obtained from the DOI of the state where the insurer is domiciled. Prior to granting approval of an application to acquire control of the insurer or holding company, the state DOI will consider a number of factors relating to the acquiror and the transaction. These laws and regulations may discourage potential acquisition proposals and may delay, deter or prevent a change of control of the Company or the sale by the Company of any of its insurance subsidiaries, including transactions that some or all of the Company’s shareholders might consider to be desirable.

Although the Company has consistently paid cash dividends in the past, it may not be able to pay cash dividends in the future.

The Company has paid cash dividends on a consistent basis since the public offering of its common stock in November 1985. However, future cash dividends will depend upon a variety of factors, including the Company’s profitability, financial condition, capital needs, future prospects and other factors deemed relevant by the Board of Directors.  The Company’s ability to pay dividends may also be limited by the ability of the Insurance Companies to make distributions to the Company, which may be restricted by financial, regulatory or tax constraints, and by the terms of the Company’s debt instruments.  In addition, there can be no assurance that the Company will continue to pay dividends even if the necessary financial and regulatory conditions are met and if sufficient cash is available for distribution.

Item 1B. Unresolved Staff Comments

None

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Item 2. Properties

The Company owns the following buildings:

Location	Purpose	Size in square feet		Percent occupied by Company at December 31, 2008
Brea, CA	Home office and I.T. facilities (2 buildings)		236,000		100	%
Los Angeles, CA	Executive offices		41,000		95	%
Rancho Cucamonga, CA	Administrative		130,000		100	%
St. Petersburg, FL	Administrative		157,000		79	%
Oklahoma, OK	Administrative		100,000		87	%
Folsom, CA	Administrative and Data Center		88,000		100	% *

* The building has been occupied by Company employees since January 2009.

The space owned and not occupied by the Company is leased to independent third party tenants.

In addition, the Company owns a 4.25 acre parcel of land in Brea, California, for future expansion.

The Company leases all of its other office space used for operations.  Office location is not crucial 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 has established reserves for lawsuits in cases where the Company is able to estimate its potential exposure and it is probable that the court will rule against the Company.  The Company vigorously defends actions against it, unless a reasonable settlement appears appropriate. An unfavorable ruling against the Company in the actions currently pending may have a material impact on the Company’s results of operations in the period of such ruling, however, it is not expected to be material to the Company’s financial condition. For a detailed description of the pending lawsuits, see Note 14 of Notes to Consolidated Financial Statements—Litigation, which is incorporated herein by reference.

The Company is also involved in proceedings relating to assessments and rulings made by the California Franchise Tax Board. See Note 6 of Notes to Consolidated Financial Statements, which is incorporated herein by reference.

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.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

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

2008	High		Low
1st Quarter	$	50.06	$	42.28
2nd Quarter	$	52.64	$	44.42
3rd Quarter	$	62.00	$	43.66
4th Quarter	$	56.47	$	36.11
2007	High		Low
1st Quarter	$	54.94	$	50.48
2nd Quarter	$	59.06	$	52.78
3rd Quarter	$	58.48	$	50.57
4th Quarter	$	56.30	$	48.76

The closing price of the Company’s common stock on February 17, 2009 was $31.24.

Dividends

Since the public offering of its common stock in November 1985, the Company has paid regular quarterly dividends on its common stock.  During 2008 and 2007, the Company paid dividends on its common stock of $2.32 and $2.08 per share, respectively.  On February 6, 2009, the Board of Directors declared a $0.58 quarterly dividend payable on March 31, 2009 to shareholders of record on March 16, 2009.

For financial statement purposes, the Company records dividends on the declaration date. The Company expects to continue the payment of quarterly dividends; however, 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.

For a discussion of certain restrictions on the payment of dividends to Mercury General by some of its insurance subsidiaries, see “Item 1. Business—Regulation—Holding Company Act” and Note 8 of Notes to Consolidated Financial Statements.

Shareholders of Record

The approximate number of holders of record of the Company’s common stock as of February 17, 2009 was 161.

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Performance Graph

The graph below compares the cumulative total shareholder return on the shares of Common Stock of the Company (MCY) for the last five years with the cumulative total return on the Standard and Poor’s 500 Index and a peer group comprised of selected property and casualty insurance companies over the same period (assuming the investment of $100 in the Company’s Common Stock, the S&P 500 Index and the peer group at the closing price on December 31, 2003 and the reinvestment of all dividends).

Comparative Five-Year Cumulative Total Returns

Among Mercury General Corporation,

Peer Group Index and S&P 500 Index

	2003		2004		2005		2006		2007		2008
Mercury General Corporation	$	100.00	$	132.37	$	132.54	$	124.45	$	122.25		118.55
Peer Group		100.00		108.84		119.70		140.28		148.13		106.31
S&P 500 Composite Index		100.00		110.88		116.33		134.70		142.10		89.53

The peer group consists of Ace Limited, Alleghany Corporation, Allstate Corporation, American Financial Group, Berkshire Hathaway, Chubb Corporation, Cincinnati Financial Corporation, CNA Financial Corporation, Erie Indemnity Company, Hanover Insurance Group, HCC Insurance Holdings, Markel Corporation, Old Republic International, PMI Group, Inc., Progressive Corporation, RLI Corporation, Selective Insurance Group, Travelers Companies, Inc., W.R. Berkley Corporation and XL Capital, Ltd.

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Item 6. Selected Financial Data

		Year Ended December 31,
		2008			2007		2006		2005		2004
		(Amounts in thousands, except per share data)
Income Data:
Earned premiums		$	2,808,839		$	2,993,877	$	2,997,023	$	2,847,733	$	2,528,636
Net investment income			151,280			158,911		151,099		122,582		109,681
Net realized investment (losses) gains			(550,520	)		20,808		15,436		16,160		25,065
Other			4,597			5,154		5,185		5,438		4,775
	Total revenues		2,414,196			3,178,750		3,168,743		2,991,913		2,668,157
Losses and loss adjustment expenses			2,060,409			2,036,644		2,021,646		1,862,936		1,582,254
Policy acquisition costs			624,854			659,671		648,945		618,915		562,553
Other operating expenses			174,828			158,810		176,563		150,201		111,285
Interest			4,966			8,589		9,180		7,222		4,222
	Total expenses		2,865,057			2,863,714		2,856,334		2,639,274		2,260,314
(Loss) Income before income taxes			(450,861	)		315,036		312,409		352,639		407,843
	Income tax (benefit) expense		(208,742	)		77,204		97,592		99,380		121,635
Net (loss) income		$	(242,119	)	$	237,832	$	214,817	$	253,259	$	286,208
Per Share Data:
Basic earnings per share		$	(4.42	)	$	4.35	$	3.93	$	4.64	$	5.25
Diluted earnings per share		$	(4.42	)	$	4.34	$	3.92	$	4.63	$	5.24
Dividends paid		$	2.32		$	2.08	$	1.92	$	1.72	$	1.48
		December 31,
		2008			2007		2006		2005		2004
		(Amounts in thousands, except per share data)
Balance Sheet Data:
Total investments		$	2,933,820		$	3,588,675	$	3,499,738	$	3,242,712	$	2,921,042
Total assets			3,950,195			4,414,496		4,301,062		4,050,868		3,622,949
Losses and loss adjustment expenses			1,133,508			1,103,915		1,088,822		1,022,603		900,744
Unearned premiums			879,651			938,370		950,344		902,567		799,679
Notes payable			158,625			138,562		141,554		143,540		137,024
Shareholders' equity			1,494,051			1,861,998		1,724,130		1,607,837		1,459,548
Book value per share			27.28			34.02		31.54		29.44		26.77

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

Overview

The operating results of property and casualty insurance companies are subject to significant quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and severity of losses, 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 Company is headquartered in Los Angeles, California and operates primarily as a personal automobile insurer selling policies through a network of independent agents and brokers in thirteen states.  The Company also offers homeowners insurance, mechanical breakdown insurance, commercial and dwelling fire insurance, umbrella insurance, commercial automobile and commercial property insurance.  Private passenger automobile lines of insurance accounted for approximately 83.7% of the $2.8 billion of the Company’s direct premiums written in 2008.  Approximately 79.9% of the private passenger automobile premiums were written in California.  The Company operates primarily in the state of California, the only state in which it operated prior to 1990.  The Company has since expanded its operations into the following states: Georgia and Illinois (1990), Oklahoma and Texas (1996), Florida (1998), Virginia and New York (2001), New Jersey (2003), and Arizona, Pennsylvania, Michigan and Nevada (2004).

This overview discusses some of the relevant factors that management considers in evaluating the Company’s performance, prospects and risks.  It is not all-inclusive and is meant to be read in conjunction with the entirety of management’s discussion and analysis, the Company’s consolidated financial statements and notes thereto and all other items contained within this Annual Report on Form 10-K.

Economic and Industry Wide Factors

• Regulatory Uncertainty – The insurance industry is subject to strict state regulation and oversight and is governed by the laws of each state in which each insurance company operates.  State regulators generally have substantial power and authority over insurance companies including, in some states, approving rate changes and rating factors and establishing minimum capital and surplus requirements.  In many states, insurance commissioners may emphasize different agendas or interpret existing regulations differently than previous commissioners.  The Company has a successful track record of working with difficult regulations and new insurance commissioners.  However, there is no certainty that current or future regulations and the interpretation of those regulations by insurance commissioners and the courts will not have an adverse impact on the Company.

• Cost Uncertainty – Because insurance companies pay claims after premiums are collected, the ultimate cost of an insurance policy is not known until well after the policy revenues are earned.  Consequently, significant assumptions are made when establishing insurance rates and loss reserves.  While insurance companies use sophisticated models and experienced actuaries to assist in setting rates and establishing loss reserves, there can be no assurance that current rates or current reserve estimates will be adequate.  Furthermore, there can be no assurance that insurance regulators will approve rate increases when the Company’s actuarial analysis shows that they are needed.

• Market Volatility - The prolonged and severe disruptions in the public debt and equity markets, including among other things, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions, have resulted in significant losses in the Company’s investment portfolio  As a result, depending on market conditions, the Company may incur substantial additional losses in future periods, which could have a material adverse impact on its results of operations, equity, business and insurer financial strength and debt ratings.

• Inflation – The largest cost component for automobile insurers is losses, which include medical costs, replacement automobile parts and labor costs.  There can be significant variation in the overall increases in medical cost inflation and it is often a year or more after the respective fiscal period ends before sufficient claims have closed for the inflation rate to be known with a reasonable degree of certainty.  Therefore, it can be difficult to establish reserves and set premium rates, particularly when actual inflation rates may be higher or lower than anticipated.

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• Loss Frequency – Another component of overall loss costs is loss frequency, which is the number of claims per risks insured.  There has been a long-term trend of declining loss frequency in the personal automobile insurance industry, which has benefited the industry as a whole.  It is unknown if loss frequency in the future will decline, remain flat or increase.

• Underwriting Cycle and Competition – The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions.  The Company has historically seen premium growth in excess of 20% during hard markets.  Premium growth rates in soft markets have been from slightly positive to negative and in 2008 they were negative 8%.  In management’s view, 2004 through 2007 was a period of very profitable results for companies underwriting automobile insurance.  Many in the industry began experiencing declining profitability in 2007 and 2008 and are now increasing rates.  Rate increases generally indicate that the market is hardening.

Revenues, Income and Cash Generation

The Company generates its revenues through the sale of insurance policies, primarily covering personal automobiles and homeowners.  These policies are sold through independent agents and brokers who receive a commission averaging 17% of net premiums written for selling and servicing policies.

During 2008, the Company continued its marketing efforts for name recognition and lead generation. The Company believes that its marketing efforts, combined with its ability to maintain relatively low prices and a strong reputation make the Company very competitive in California and in other states.  Net advertising expenditures were approximately $26 million and $28 million during 2008 and 2007, respectively.

The Company believes that it has a thorough underwriting process that gives the Company an advantage over its competitors.  The Company views its agent relationships and underwriting process as one of its primary competitive advantages because it allows the Company to charge lower prices yet realize better margins than many competitors.

The Company also generated income from its investment portfolio.  Approximately $151 million in pre-tax investment income was generated during 2008 on a portfolio of approximately $2.9 billion at fair market value at December 31, 2008, compared to $159 million pre-tax investment income during 2007 on a portfolio of approximately $3.6 billion at fair market value at December 31, 2007.  The portfolio is managed by Company personnel with a view towards maximizing after-tax yields and limiting interest rate and credit risk.

The Company’s operating results and growth have allowed it to consistently generate positive cash flow from operations, which was approximately $64 million and $216 million in 2008 and 2007, respectively.  Cash flow from operations has been used to pay shareholder dividends and to help support growth.

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Opportunities, Challenges and Risks

The Company currently underwrites personal automobile insurance in thirteen states:  Arizona, California, Florida, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas and Virginia.  The Company expects to continue its growth by expanding into new states in future years with the objective of achieving greater geographic diversification.

There are, however, challenges and risks involved in entering each new state, including establishing adequate rates without any operating history in the state, working with a new regulatory regime, hiring and training competent personnel, building adequate systems and finding qualified agents to represent the Company. The Company does not expect to enter into any new states during 2009.

The Company is also subject to risks inherent in its business, which include but are not limited to the following (See also “Item 1A. Risk Factors.”):

• A catastrophe, such as a major wildfire, earthquake or hurricane, could cause a significant amount of loss to the Company in a very short period of time.

• A major regulatory change could make it more difficult for the Company to generate new business or reduce the profitability of the Company’s existing business.

• A sharp upward increase in market interest rates or a downturn in securities markets could cause a significant loss in the value of the Company’s investment portfolio.

To the extent it is within the Company’s control, the Company seeks to manage these risks in order to mitigate the effect that major events would have on the Company’s financial position.

Technology

In 2008, the Company launched its new internet agency portal, Mercury First, in New York.  The Mercury First rollout is continuing to all states through 2009.  Mercury First is a single entry point for agents and brokers that provides a broad suite of capabilities.  One of its most powerful tools is a Point of Sale (POS) system that allows agents and brokers to easily obtain and compare quotes and write new business.  The POS for Private Passenger Auto is already in use.  POS solutions for Commercial Auto and Homeowner are planned to be in use by agents in 2009.  Mercury First is also an easy-to-use agency portal that provides a customized work queue for each agency user showing new business leads, underwriting requests and other pertinent customer information in real time.  Agents can also assist customers with paying bills, reporting claims or updating their records.  The system enables quick access to documents and forms as well as empowering the agents with several self-service capabilities.

The Company began developing its NextGen computer system in 2002 to replace its legacy underwriting, billings, claims and commissions systems.  The NextGen system was designed to be a multi-state, multi-line system to enable the Company to enter new states more rapidly, as well as respond to legislative and regulatory changes more easily.  The Company completed rollout of NextGen for all underwriting, billing, claims and commission functions supporting Private Passenger Auto in seven states (Virginia, New York, Florida, California, Georgia, Illinois, and Texas).  The legacy Private Passenger Auto system has been retired.

As part of the Company’s commitment to service excellence, the Company launched an initiative in 2008 to improve its call center technologies.  The initiative’s goal is to enhance telephony infrastructure using Voice over Internet Protocol, centralized call recording, quality monitoring and workforce management software.  The technology has been integrated with the Company’s claim processing software and deployed to the centralized customer service call center. During 2009, this technology will be rolled out to other claims processing field offices.

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Regulatory and Legal Matters

The process for implementing rate changes varies by state, with California, Georgia, New York, New Jersey, Pennsylvania and Nevada requiring prior approval from the DOI before a rate may be implemented.  Illinois, Texas, Virginia, Arizona and Michigan only require that rates be filed with the DOI, while 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.  During 2008, the Company implemented automobile and homeowners insurance rate decreases in California that were initially filed in August 2006 and approved by the California DOI in January 2008 as part of the Company’s compliance with regulations proposed by the California DOI and approved in July 2006, as more fully described below.  In five other states, the Company implemented automobile rate increases.

The California DOI uses rating factor regulations requiring automobile insurance rates to be determined in decreasing order of importance by (1) driving safety record, (2) miles driven per year, (3) years of driving experience and (4) other factors as determined by the California DOI to have a substantial relationship to the risk of loss and adopted by regulation.

In April 2007, regulations became effective that generally tighten the existing Proposition 103 prior approval ratemaking regime primarily by establishing a maximum allowable rate of return (calculated by adding 6 percent plus the average of short, intermediate, and long-term T-bill rates) and a minimum allowable rate of return of negative 6 percent of surplus. However, the practical impact of these limitations is unclear because the new regulations allow for the California DOI to grant a number of variances based on loss prevention, business mix, service to underserved communities, and other factors. In October 2007, the California DOI invited comments from consumer groups and the insurance industry in an effort to set appropriate standards for granting or denying specific variances and to provide sufficient instruction regarding what information or data to submit when an insurer is applying for a specific variance.  The comment period ended on November 16, 2007. The California DOI then published proposed amendments to its regulations and held an informal workshop on them on April 7, 2008. On April 29, 2008, the Commissioner issued a new notice reflecting slight modifications to the proposed regulations and superseding the prior version.  The proposed changes were approved as emergency regulations by the Office of Administrative Law (“OAL”) on May 16, 2008 and became effective as of that date.

On July 14, 2006, the California OAL approved proposed regulations by the California DOI that effectively reduce the weight that insurers can place on a person’s residence when establishing automobile insurance rates.  Insurance companies in California are required to file rating plans with the California DOI that comply with the new regulations.  There is a two year phase-in period for insurers to fully implement those plans. The Company made a rate filing in August 2006 that reduced the territorial impact of its rates and requested a small overall rate increase. The California DOI approved the August 2006 filing in January 2008, which resulted in a small rate increase for two of the California insurance subsidiaries and a small decrease for a third, for a total net rate reduction of approximately 2.5%.  The newly approved rates went into effect in April 2008. In July 2008, the Company made an additional rate filing to bring its rates into full compliance with the new regulations.  However, the Company cannot predict whether the California DOI will determine that the Company’s rates are in full compliance with the new regulations as a result of this filing. In general, the Company expects that the regulations will cause rates for urban drivers to decrease and those for non-urban drivers to increase. These rate changes are likely to increase consumer shopping for insurance which could affect the volume and the retention rates of the Company’s business.  It is the Company’s intention to maintain its competitive position in the marketplace while complying with the new regulations.

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In March 2006, the California DOI issued an Amended Notice of Non-Compliance (“NNC”) to the NNC originally issued in February 2004 alleging that the Company charged rates in violation of the California Insurance Code, willfully permitted its agents to charge broker fees in violation of California law, and willfully misrepresented the actual price insurance consumers could expect to pay for insurance by the amount of a fee charged by the consumer’s insurance broker. Through this action, the California DOI seeks to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee, which the California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the California DOI seeks to impose a penalty for each and every date on which the Company allegedly used a misleading advertisement alleged in the NNC.  Finally, based upon the conduct alleged, the California DOI also contends that the Company acted fraudulently in violation of Section 704(a) of the California Insurance Code, which permits the California Commissioner of Insurance to suspend certificates of authority for a period of one year. The Company filed a Notice of Defense in response to the NNC. The Company does not believe that it has done anything to warrant a monetary penalty from the California DOI. The San Francisco Superior Court, in Robert Krumme, On Behalf Of The General Public v. Mercury Insurance Company, Mercury Casualty Company, and California Automobile Insurance Company, denied plaintiff’s requests for restitution or any other form of retrospective monetary relief based on the same facts and legal theory. The matter is currently in discovery and a hearing before the administrative law judge is scheduled to start on March 16, 2009.  This matter has been the subject of five continuations since the original NNC was issued in 2004.

The Company is not able to determine the impact of any of the legal and regulatory matters described above. It is possible that the impact of some of the changes could adversely affect the Company and its operating results, however, the ultimate outcome is not expected to be material to the Company’s financial position.

The California Franchise Tax Board (“FTB”) has audited the 1997 through 2002 and 2004 tax returns and accepted the 1997 through 2000 returns to be correct as filed. The Company received a notice of examination for the 2003 tax return from the FTB in January 2008. For the Company’s 2001, 2002, and 2004 tax returns, the FTB has taken exception to the state apportionment factors used by the Company.  Specifically, the FTB has asserted that payroll and property factors from Mercury Insurance Services, LLC, a subsidiary of Mercury Casualty Company, that are excluded from the Mercury General California Franchise tax return, should be included in the California apportionment factors. In addition, for the 2004 tax return, the FTB has asserted that a portion of management fee expenses paid by Mercury Insurance Services, LLC should be disallowed. Based on these assertions, the FTB has issued notices of proposed tax assessments for the 2001, 2002 and 2004 tax years totaling approximately $5 million. The Company strongly disagrees with the position taken by the FTB and plans to formally appeal the assessments before the California State Board of Equalization (“SBE”).  An unfavorable ruling against the Company may have a material impact on the Company’s results of operations in the period of such ruling. Management believes that the issue will ultimately be resolved in favor of the Company. However, there can be no assurance that the Company will prevail on this matter.

The Company is also involved in legal proceedings incidental to its insurance business. See Note 14 of Notes to Consolidated Financial Statements—Commitments and Contingencies—Litigation.

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Critical Accounting Estimates

Reserves

The preparation of the Company’s consolidated financial statements requires judgment and estimates.  The most significant is the estimate of loss reserves as required by Statement of Financial Accounting Standards No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS No. 60”), and Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”).  Estimating loss reserves is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the reserve that is required.  Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of repair materials and labor rates, among other factors, 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 a 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.

The Company calculates a point estimate rather than a range of loss reserve estimates.  There is inherent uncertainty with estimates and this is particularly true with estimates for loss reserves.  This uncertainty comes from many factors which may include changes in claims reporting and settlement patterns, changes in the regulatory or legal environment, uncertainty over inflation rates and uncertainty for unknown items.  The Company does not make specific provisions for these uncertainties, rather it considers them in establishing its reserve by looking at historical patterns and trends and projecting these out to current reserves.  The underlying factors and assumptions that serve as the basis for preparing the reserve estimate include paid and incurred loss development factors, expected average costs per claim, inflation trends, expected loss ratios, industry data and other relevant information.

The Company also engages independent actuarial consultants to review the Company’s reserves and to provide the annual actuarial opinions required under state statutory accounting requirements. The Company does not rely on actuarial consultants for GAAP reporting or periodic report disclosure purposes.

The Company analyzes loss reserves quarterly primarily using the incurred loss development, average severity and claim count development methods described below. The Company also uses the paid loss development method to analyze loss adjustment expense reserves and industry claims data as part of its reserve analysis. When deciding which method to use in estimating its reserves, the Company evaluates the credibility of each method based on the maturity of the data available and the claims settlement practices for each particular line of business or coverage within a line of business. When establishing the reserve, the Company will generally analyze the results from all of the methods used rather than relying on one method. While these methods are designed to determine the ultimate losses on claims under the Company’s policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes. The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.

• The incurred loss development method analyzes historical incurred case loss (case reserves plus paid losses) development to estimate ultimate losses. The Company applies development factors against current case incurred losses by accident period to calculate ultimate expected losses. The Company believes that the incurred loss development method provides a reasonable basis for evaluating ultimate losses, particularly in the Company’s larger, more established lines of business which have a long operating history.

• The claim count development method analyzes historical claim count development to estimate future incurred claim count development for current claims. The Company applies these development factors against current claim counts by accident period to calculate ultimate expected claim counts.

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• The average severity method analyzes historical loss payments and/or incurred losses divided by closed claims and/or total claims to calculate an estimated average cost per claim. From this, the expected ultimate average cost per claim can be estimated. The average severity method coupled with the claim count development method provide meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing reserves.

• The paid loss development method analyzes historical payment patterns to estimate the amount of losses yet to be paid. The Company primarily uses this method for loss adjustment expenses because specific case reserves are generally not established for loss adjustment expenses.

In states with little operating history where there are insufficient claims data to prepare a reserve analysis relying solely on Company historical data, the Company generally projects ultimate losses using industry average loss data or expected loss ratios. As the Company develops an operating history in these states, the Company will rely increasingly on the incurred loss development and average severity and claim count development methods. The Company analyzes catastrophe losses separately from non-catastrophe losses.  For catastrophe losses, the Company determines claim counts based on claims reported and development expectations from previous catastrophes and applies an average expected loss per claim based on reserves established by adjusters and average losses on previous similar catastrophes.

There are many factors that can cause variability between the ultimate expected loss and the actual developed loss.  Because the actual loss for a particular accident period is unknown until all claims have settled for that period, the Company must estimate what it expects that loss to be.  While there are certainly other factors, the Company believes that the following items tend to create the most variability between expected losses and actual losses:

• Variability in inflation expectations – particularly on coverages that take longer to settle such as the California automobile bodily injury coverage.

• Variability in the number of claims reported subsequent to a period-end relating to that period – particularly on coverages that take longer to settle such as the California automobile bodily injury coverage.

• Variability between Company loss experience and industry averages for those lines of business that the Company is relying on industry averages to establish reserves.

• Unexpected large individual losses or groups of losses arising from older accident periods typically caused by an event that is not reflected in the historical company data used to establish reserves.

These items are discussed in detail:

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1.    Inflation Variability – California automobile lines of business

For the Company’s California automobile lines of business, the bodily injury (BI) reserves comprise approximately 65% of the total reserve; material damage, including collision, comprehensive, and property damage (MD) reserves make up approximately 10% of the total reserve; and loss adjustment expense reserves make up approximately 25% of the total reserve. The BI reserves account for such a large portion of the total because BI claims tend to close much slower than MD claims. The majority of the loss adjustment expense reserves consist of estimated costs to defend BI claims, so those reserves also tend to close more slowly than MD claims. Loss development on MD reserves is generally insignificant because MD claims are closed quickly.

BI loss reserves are generally the most difficult to estimate because they take longer to close than most of the Company’s other coverages. The Company’s BI policy covers injuries sustained by any person other than the insured, except in the case of uninsured and underinsured motorist BI coverage, which covers damages to the insured for BI caused by uninsured or underinsured motorists. BI payments are primarily for medical costs and general damages.

The following table represents the typical closure patterns of BI claims in the California automobile insurance coverage:

	% of Total
	Claims closed	Dollars Paid
BI claims closed in the accident year reported	35% to 40%		15	%
BI claims closed one year after the accident year reported	75% to 80%		60	%
BI claims closed two years after the accident year reported	93% to 97%		90	%
BI claims closed three years after the accident year reported	97% to 99%		98	%

Claims that close during the initial accident year reported are generally the smaller, less complex claims that settle, on average, for approximately $2,000 to $2,500 whereas the average settlement, once all claims are closed in a particular accident year, is approximately $7,500 to $9,000. The Company creates incurred loss triangles to estimate ultimate losses utilizing historical reserving patterns and evaluates the results of this analysis against its frequency and severity analysis to establish BI reserves. The Company adjusts development factors to account for inflation trends it sees in loss severity.  As a larger proportion of claims from an accident year are settled, there becomes a higher degree of certainty for the reserves established for that accident year.  Consequently, there is a decreasing likelihood of reserve development on any particular accident year, as those periods age.  The Company believes that the accident years that are most likely to develop are the 2006 through 2008 accident years; however it is also possible that older accident years could develop as well.

In general, when establishing reserves, the Company expects that historical trends will continue.  Furthermore, the Company believes that costs tend to increase, which is generally consistent with historical data, and therefore the Company believes that it is more reasonable to expect inflation than deflation.  Many potential factors can affect the BI inflation rate, including: changes in statutes and regulations, an increase or reduction in litigated files, general economic factors, more timely handling of claims, safer vehicles, changes in weather patterns, and gasoline prices; however, whether these are the factors that actually impacted the BI losses, and the magnitude of that impact is unknown.

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The Company believes that it is reasonably possible that the California automobile BI inflation rate could vary from recorded amounts by as much as 7%, 5% and 4% for 2008, 2007 and 2006, respectively.  However, the variation could be more or less than these amounts.  As a comparison, at December 31, 2008 the actual variation for the amounts recorded at December 31, 2007 was 5.6%, 3.7% and 1.5% for the 2007, 2006 and 2005 accident years, respectively.  The following table shows the effects on the 2008, 2007 and 2006 accident year California BI loss reserves based on possible variations in the severity recorded:

California Bodily Injury Inflation Reserve Sensitivity Analysis

Accident Year	Number of Claims Expected (a)		Actual Recorded Severity at 12/31/08		Implied Inflation Rate Recorded			(A) Pro-forma severity if actual severity is lower by: 7% for 2008, 5% for 2007 and 4% for 2006		(B) Pro-forma severity if actual severity is higher by 7% for 2008, 5% for 2007 and 4% for 2006		Loss redundancy if actual severity is less than recorded (Column A)		Loss development if actual severity is more than recorded (Column B)
2008		31,737	$	8,831		12.4	%	$	8,213	$	9,449	$	19,613,000	$	(19,613,000	)
2007		35,716	$	7,856		5.2	%	$	7,463	$	8,249	$	14,036,000	$	(14,036,000	)
2006		36,999	$	7,465		3.6	%	$	7,166	$	7,764	$	11,062,000	$	(11,062,000	)
2005	Not Applicable		$	7,204
Total Loss Redundancy (Development)												$	44,711,000	$	(44,711,000	)

 (a) The recent downward trend in the total number of claims reported is reflective of declining loss frequencies and a decline in the number of insurance policies issued.

During 2008, the Company experienced a large increase in the average cost paid on claims that closed within the 2008 accident period.  Only between 35% and 40% of the claims close in the first year, however the averages are still an indicator that inflation is increasing at a higher rate than in previous recent accident periods.  As a result, the Company adjusted inflation rate assumptions upwards for the 2008 accident year, as compared to 2007.  The Company is uncertain as to what is driving the larger than normal inflation increases but, as shown in the table above, it is not unusual for the rate to vary from period to period.

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2.    Claims reported variability (Claim Count Development)

The Company generally estimates ultimate claim counts for an accident period based on development of claim counts in prior accident periods.  Typically, for California automobile BI claims, the Company has experienced that approximately 5% to 10% additional claims will be reported in the year subsequent to an accident year, but such late reported claims could be more or less than the Company’s expectations.  Typically, almost every claim is reported within one year following the end of an accident year and at that point the Company has a high degree of certainty as to what the ultimate claim count will be.  The following table shows the number of BI claims reported at the end of the accident period and one year later:

California Bodily Injury Claim Count Development Table

Accident year	Number of claims reported for that accident year as of December 31 of that accident year		Number of claims reported at December 31 one year later		Percentage increase in number of claims reported
2002		31,356		34,355		9.6	%
2003		33,043		36,314		9.9	%
2004		35,084		37,246		6.2	%
2005		34,845		36,802		5.6	%
2006		34,455		37,098		7.7	%
2007		33,378		35,638		6.8	%

There are many potential factors that can affect the number of claims reported after a period end including changes in weather patterns, a reduction in the amount of litigated files, whether the last day of the year falls on a weekday or a weekend and vehicle safety improvements.  However, the Company is unable to determine which, if any, of the factors actually impacted the number of claims reported and, if so, by what magnitude.

At December 31, 2008, there were 29,647 BI claims reported for the 2008 accident year and the Company estimates that these are expected to ultimately grow by 7.0% to approximately 31,737 claims.  The Company believes that while actual development in recent years has ranged between roughly 5% and 10%, it is reasonable to expect that the range could be as great as to be between 3% and 12%.  Actual development may be more or less than the expected range.

The following table shows the effect should the actual amount of claims reported develop differently within the broader reasonably possible range than what the Company recorded at December 31, 2008:

California Bodily Injury Claim Count Reserve Sensitivity Analysis

2008 Accident year	Claims reported		Amount recorded at 12/31/08 at 7.0% claim count development		Total expected amount if claim count development is 3%		Total expected amount if claim count development is 12%
Claim Count		29,647		31,737		30,536		33,205
Approximate average cost per claim	Not meaningful		$	8,831	$	8,831	$	8,831
Total dollars	Not meaningful		$	280,300,000	$	269,700,000	$	293,200,000
Total Loss Redundancy (Development)					$	10,600,000	$	(12,900,000	)

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3.    Variability between the Company’s loss experience and industry averages for those lines of business where there is a heavy reliance on industry averages to establish reserves, primarily New Jersey bodily injury claims.

New Jersey is a no-fault state, which means that the majority of medical costs are paid directly by a policyholder’s insurance company rather than by the insurance company of the person who was at-fault in the accident.  This coverage is known as personal injury protection (“PIP”) and in New Jersey the standard policy has a statutory limit of $250,000 per person. In New Jersey, the BI coverage provides compensation for “pain and suffering” and any out of pocket medical costs not provided by the PIP coverage.  The PIP limits are very high in New Jersey and the BI cases are often more complicated and expensive than in other states, therefore they tend to take longer to settle.  Consequently, establishing a reserve for these coverages in New Jersey is generally more difficult than in most of the states in which the Company operates.  Adding to the reserving difficulty is the fact that the Company has a very short operating history in New Jersey, underwriting personal automobile insurance only since the fall of 2003.

As a result of the lack of sufficient operating history prior to 2008, the Company relied on industry loss data to determine the ultimate losses for the BI and PIP coverage’s in New Jersey.  The reserve approach utilized for New Jersey in 2007 assumed that there would not be significantly more development on the 2004 accident year claims, due to the maturity of those claims, and that the relationship between Company loss data and industry loss data in accident years 2005, 2006 and 2007 will be similar to that experienced in accident year 2004.

In 2008, it became apparent that the Company results were turning out differently than estimates derived by the industry results.  In particular, loss severities for the PIP coverage were developing into larger amounts than the industry data suggested.  With the passage of 2008, the loss data began to mature and the Company began utilizing its own historical loss patterns to determine the reserves.  While management believes that this has led to a more reliable reserve estimate, there is still a great deal of potential variability in the reserves.  This is particularly true with PIP and BI losses which often take years to settle.

At December 31, 2008 the Company estimates that in New Jersey, for every 10% increase on recorded BI and PIP loss severities for the 2006, 2007 and 2008 accident years, an additional loss reserve of approximately $20 million would be required, with the converse holding true if the loss severities recorded were reduced.  As these accident years continue to mature, there is likely to be additional development, however, it is uncertain whether this development will be positive or negative.

4.    Unexpected large individual losses or groups of losses arising from older accident periods typically caused by an event that is not reflected in the historical company data used to establish reserves.

These types of losses are generally not provided for in the current reserve because they are not known or expected and tend to be unquantifiable.  Once known, the Company establishes a provision for the losses.  Consequently, it is not possible to provide any meaningful sensitivity analysis as to the potential size of any unexpected losses.  These losses can be caused by many factors, including unexpected legal interpretations of coverage, ineffective claims handling, regulation extending claims reporting periods, assumption of unexpected or unknown risks, adverse court decisions as well as many unknown factors.  Conversely, it is possible to experience positive reserve development when one or more of these factors prove to be beneficial to the Company.

One instance when there were large unanticipated losses arising from older accident periods was in 2006 from extra-contractual losses in Florida.  Typically, extra-contractual claims are those that settle for more than the policy limits because the original claim was denied, thus exposing the Company to losses greater than the policy limits. Claims may be denied for various reasons, including material misrepresentations made by the insured on the policy application or insureds that have violated prohibitions in the insurance contract or when there is fraud involved.  These types of losses are fairly infrequent but can amount to millions of dollars per claim, especially if the injured party sustained a serious physical injury.  Consequently, these claims can have a large impact on the Company’s losses.  During 2006, the Company had extra-contractual losses that settled for amounts much greater than the policy limits and much greater than expected.  As a result of these settlements, the Company, during the second quarter of 2006, reevaluated its exposure to extra-contractual claims in Florida and increased its reserve estimates for prior accident years.

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To mitigate this specific risk, during 2006 the Company established new claims handling and review procedures in Florida, as well as in other states, that are intended to reduce the risk of receiving extra-contractual claims.  Consequently, the Company does not expect that Florida extra-contractual claims will continue to have a significant impact on the financial statements or reserves in the future.  However, it is possible that these procedures will not prove entirely effective and the Company may continue to have material extra-contractual losses.   It is also possible that the Company has not identified and established a sufficient reserve for all of the extra-contractual losses occurring in the older accident years, even though a comprehensive claims file review was undertaken, or that the Company will experience additional development on these reserves.

Discussion of loss reserves and prior period loss development at December 31, 2008

At December 31, 2008 and 2007, the Company recorded its point estimate of approximately $1,134 million and $1,104 million, respectively, in loss and loss adjustment expense reserves which includes approximately $385 and $322 million, respectively, of incurred but not reported (“IBNR”) loss reserves.  IBNR includes estimates, based upon past experience, of ultimate developed costs which may differ from case estimates, unreported claims which occurred on or prior to December 31, 2008 and estimated future payments for reopened-claims reserves.  Management believes that the liability established at December 31, 2008 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.

The Company reevaluates its reserves quarterly. When management determines that the estimated ultimate claim cost requires reduction for previously reported accident years, positive development occurs and a reduction in losses and loss adjustment expenses is reported in the current period. If the estimated ultimate claim cost requires an increase for previously reported accident years, negative development occurs and an increase in losses and loss adjustment expenses is reported in the current period.

For 2008, the Company had negative development of approximately $89 million on the 2007 and prior accident years’ loss and loss adjustment expense reserves which at December 31, 2007 totaled approximately $1,104 million.

The primary causes of the negative loss development were:

(1) The estimates for California Bodily Injury Severities and California Defense and Cost Containment reserves established at December 31, 2007 were too low causing adverse development of approximately $45 million.  During the year, the Company experienced a lengthening of the pay-out period for claims that are settled after the first year and a large increase in the average amounts paid on closed claims.  The Company believes that the lengthening of the pay-out periods may be attributable to a law passed in California several years ago that extended the statute for filing claims from one year to two years.  Initial indications, when the law was passed, were that the law would have little impact on development patterns and therefore it was not factored into the Company’s reserve estimates.  In hindsight, claims payouts 2 to 4 years after the period-end have increased thereby affecting the loss reserve estimates.  The Company believes that this trend was factored into its reserve estimate at year-end 2008.

(2) The Company had approximately $30 million of adverse development on its New Jersey reserves established at December 31, 2007.  Due to short operating history and rapid growth in that state, the Company had limited internal historical claims information to estimate BI, PIP and related loss adjustment expense reserves as of December 31, 2007.  Consequently, the Company relied substantially on industry data to help set these reserves.  During 2008, the reserve indications using the Company’s own historical data rather than industry data led to increases in estimates for both PIP losses and loss adjustment expenses.  In particular, loss severities experienced by the Company data for the PIP coverage developed into amounts larger than industry data suggested.  The Company is now using its own historical data, rather than industry data to set New Jersey loss reserves.  Management believes that, over time this will lead to less variation in reserve estimates.

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Premiums

The Company complies with SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” in recognizing revenue on insurance policies written.  The Company’s insurance premiums are recognized as income ratably over the term of the policies, that is, in proportion to the amount of insurance protection provided.  Unearned premiums are carried as a liability on the balance sheet and are computed on a monthly pro-rata basis.  The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized acquisition costs and maintenance costs to related unearned premiums, net of investment income.  To the extent that any of the Company’s lines of business become substantially unprofitable, a premium deficiency reserve may be required. The Company does not expect this to occur on any of its significant lines of business.  At December 31, 2008, a premium deficiency reserve of $639,000 was established for New Jersey operations after anticipating 4% investment income.

Investments

Beginning January 1, 2008, all of the Company’s fixed maturity and equity investments are classified as “trading” and carried at fair value as required by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), as amended, and SFAS No. 159.  Prior to January 1, 2008, the Company’s fixed maturity and equity investment portfolios were classified either as “available for sale” or “trading” and carried at fair value under SFAS No. 115, as amended.  The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) and SFAS No. 159 as of January 1, 2008.  Equity holdings, including non-sinking fund preferred stocks, are, with minor exceptions, actively traded on national exchanges or trading markets, and were valued at the last transaction price on the balance sheet date.  Changes in fair value of the investments are reflected in net realized investment gains or losses in the consolidated statements of operations as required under SFAS No. 115, as amended, and SFAS No. 159.

For equity securities, the net loss due to changes in fair value in 2008 was approximately 52.6% of fair value at December 31, 2008.  The primary cause of the losses in fair value of equity securities was the overall decline in the stock markets, which saw a decline of approximately 38.5% in the S&P 500 index in 2008.  The underperformance of the Company’s equities was primarily due to the large allocation to energy related stocks, which experienced a decline in value more severe than that of the overall stock market.  For fixed maturity securities, the net loss due to changes in fair value was approximately 9.9% of fair value in 2008.  The Company believes that the primary causes of the majority of the losses in fair value of fixed maturity securities were ongoing downgrades of municipal bond insurers, widening credit spreads, and reduced market liquidity.

Fair Value of Financial Instruments

Certain financial assets and financial liabilities are recorded at fair value.  The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The fair values of the Company’s financial instruments are generally based on, or derived from, executable bid prices. In the case of financial instruments transacted on recognized exchanges, the observable prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded.

The Company’s financial instruments include securities issued by the U.S. government and its agencies, securities issued by states and municipalities, certain corporate and other debt securities, corporate equity securities, and exchange traded funds.  Over 99% of the fair value of the financial instruments held at December 31, 2008 is based on observable market prices, observable market parameters, or is derived from such prices or parameters.  The availability of observable market prices and pricing parameters can vary across different financial instruments.  Observable market prices and pricing parameters in a financial instrument, or a related financial instrument, are used to derive a price without requiring significant judgment.

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Certain financial instruments that the Company holds or may acquire may lack observable market prices or market parameters currently or in future periods because they are less actively traded.  The fair value of such instruments is determined using techniques appropriate for each particular financial instrument. These techniques may involve some degree of judgment.  The price transparency of the particular financial instrument will determine the degree of judgment involved in determining the fair value of the Company’s financial instruments. Price transparency is affected by a wide variety of factors, including, for example, the type of financial instrument, whether it is a new financial instrument and not yet established in the marketplace, and the characteristics particular to the transaction.  Financial instruments for which actively quoted prices or pricing parameters are available or for which fair value is derived from actively quoted prices or pricing parameters will generally have a higher degree of price transparency.  By contrast, financial instruments that are thinly traded or not quoted will generally have diminished price transparency.  Even in normally active markets, the price transparency for actively quoted instruments may be reduced for periods of time during periods of market dislocation.  Alternatively, in thinly quoted markets, the participation of market makers willing to purchase and sell a financial instrument provides a source of transparency for products that otherwise is not actively quoted.  For a further discussion, see Note 2 of Notes to Consolidated Financial Statements—Investments and Investment Income—Fair Value of Investments in 2008.

Income Taxes

At December 31, 2008, the Company’s deferred income taxes were in a net asset position, compared to a net liability position at December 31, 2007.  The movement to net asset position is due primarily to a decrease in the market value of investment securities.  The Company assesses the likelihood that deferred tax assets will be realized and to the extent management believes realization is not likely, a valuation allowance is established.  Management’s recoverability assessment is based on estimates of anticipated capital gains, available capital gains realized in prior years that could be utilized through carryback and tax-planning strategies available to generate future taxable capital gains, which are expected to be sufficient to offset recorded deferred tax assets.

Specifically, the Company has the ability and intention to generate realized capital gains, and minimize realized capital losses for which no tax benefit will be derived, by employing a combination of prudent planning strategies. The Company expects to hold certain quantities of debt securities, which are currently in loss positions, to recovery or maturity.  Management believes unrealized losses related to these debt securities, which represent a significant portion of the unrealized loss positions at year-end, are not due to default risk.  Thus, the principal amounts are believed to be fully realizable at maturity.  The Company has a long-term horizon for holding these securities, which management believes will allow avoidance of forced sales prior to maturity.  The Company has prior years’ realized capital gains available to offset realized capital losses, via the filing of carryback refund claims.  The Company also has unrealized gains in its investment portfolio which could be realized through asset dispositions, at management's discretion.  Further, the Company has the capability to generate additional realized capital gains by entering into a sale-leaseback transaction using one or more properties of its appreciated real estate holdings.  Finally, the Company has an established history of generating capital gain premiums earned through its common stock call option program.  Based on the continued existence of the options market, the substantial amount of capital committed to supporting the call option program, and the Company's favorable track record in generating net capital gains from this program in both upward and downward markets, management believes it will be able to generate sufficient amounts of option premium capital gains (more than sufficient to offset any losses on the underlying stocks employed in the program) on a consistent, long term basis.  By prudent utilization of some or all of these actions, management believes that it has the ability and intent to generate capital gains, and minimize tax losses, in a manner sufficient to avoid losing the benefits of its deferred tax assets.

Management's position is supported based on the Company's steady history of generating positive cash flow from operations, as well as its reasonable expectation that its cash flow needs can be met in future periods without the forced sale of its investments.  This capability will enable management to use its discretion in controlling the timing and amount of realized losses it generates during future periods.  Thus, although realization is not assured, management believes it is more likely than not that the Company's deferred tax assets will be realized.

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Contingent Liabilities

The Company has known, and may have unknown, potential liabilities that are evaluated using the criteria established by SFAS No. 5.  These include claims, assessments or lawsuits relating to the Company’s business.  The Company continually evaluates these potential liabilities and accrues for them or discloses them in the notes to the consolidated financial statements if they meet the requirements stated in SFAS No. 5.  While it is not possible to know with certainty the ultimate outcome of contingent liabilities, an unfavorable result may have a material impact on the Company’s quarterly results of operations; however, it is not expected to be material to the Company’s financial position.  See also “Regulatory and Legal Matters” and Note 14 of Notes to Consolidated Financial Statements.

Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net premiums earned and net premiums written in 2008 decreased approximately 6.2% and 7.8%, respectively, from 2007.  Net premiums written by the Company’s California operations were $2.2 billion in 2008, a 6.2% decrease from 2007.  Net premiums written by the Company’s non-California operations were $589.0 million in 2008, a 13.1% decrease from 2007.  The decrease in net premiums written is primarily due to a small decrease in the number of policies written and slightly lower average premiums per policy reflecting the continuing soft market conditions.

Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any applicable reinsurance.  Net premiums written is a statutory measure designed to determine production levels.  Net premiums earned, the most directly comparable GAAP measure, represents the portion of net premiums written that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the term of the policies.  The following is a reconciliation of total Company net premiums written to net premiums earned:

	2008		2007
	(Amounts in thousands)
Net premiums written	$	2,750,226	$	2,982,024
Decrease in unearned premium		58,613		11,853
Net premiums earned	$	2,808,839	$	2,993,877

The loss ratio (GAAP basis) (loss and loss adjustment expenses related to premiums earned) was 73.3% and 68.0% in 2008 and 2007, respectively.  There was negative development of approximately $89 million and $19 million on prior accident years’ loss reserves for 2008 and 2007, respectively.  Excluding the effect of prior accident years’ loss development, the loss ratio was 70.4% and 67.4% in 2008 and 2007, respectively.  The increase in the loss ratio excluding the effect of prior accident years’ loss development is primarily due to higher severity in the California automobile lines of business which was partially offset by lower frequency in the same lines.

The expense ratio (GAAP basis) (policy acquisition costs and other operating expenses related to premiums earned) was 28.5% and 27.4% in 2008 and 2007, respectively.  The increase in the expense ratio largely reflects costs such as payroll, benefits, and advertising that have not declined in proportion to the decline in premium volumes; an increase in technology-related expenses; the establishment of the product management function; and approximately $2 million of AIS acquisition-related expenses.

The combined ratio of losses and expenses (GAAP basis) is the key measure of underwriting performance traditionally used in the property and casualty insurance industry.  A combined ratio under 100% generally reflects profitable underwriting results; and a combined ratio over 100% generally reflects unprofitable underwriting results.  The combined ratio of losses and expenses (GAAP basis) was 101.8% and 95.4% in 2008 and 2007, respectively.  The Company’s underwriting performance contributed $51.3 million of loss and $138.8 million of income to the Company’s results of operations before income tax benefit and expense for 2008 and 2007, respectively.

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Investment income was $151.3 million and $158.9 million in 2008 and 2007, respectively.  The after-tax yield on average investments (fixed maturities, equities and short-term investments valued at cost) was 3.9% and 4.0% in 2008 and 2007, respectively, on average invested assets of $3.5 billion for each period.  The slight decrease in after-tax yield is due to a decrease in short-term interest rates.

Included in net (loss) income are net realized investment losses of $550.5 million in 2008 compared to net realized investment gains of $20.8 million in 2007.  Net realized investment losses of $550.5 million in 2008 include losses of $525.7 million due to changes in the fair value of total investments measured at fair value pursuant to SFAS No. 159.  These losses, primarily in fixed maturity securities, arise from the market value declines on the Company’s holdings during 2008 resulting from ongoing downgrades of municipal bond insurers, widening credit spreads, economic downturn impacting municipalities and the lack of liquidity in the market.

The income tax benefit of $208.7 million in 2008, compared to a tax expense of $77.2 million in 2007, resulted primarily from realized losses in the investment portfolio.

Operating income for 2008 was $115.7 million, down 48% from the prior year largely due to a decrease in premiums earned reflecting the continuing soft market conditions, higher losses as a result of inflation and higher other operating expenses.  In addition, a decrease in net investment income resulting from lower investment yields and lower invested assets contributed to the decrease in operating income.  Partially offsetting this was a $17.5 million net tax benefit realized from the tax case victory over the California FTB.

Operating income is a non-GAAP measure which represents net income excluding realized investment gains and losses, net of tax, and adjustments for other significant non-recurring, infrequent or unusual items. Net income is the GAAP measure that is most directly comparable to operating income.  Operating income is meant as supplemental information and is not intended to replace net income. It should be read in conjunction with the GAAP financial results.  The following is a reconciliation of operating income to the most directly comparable GAAP measure:

	2008			2007
	(Amounts in thousands)
Operating income, net of tax	$	115,719		$	224,307
Net realized investment (losses) gains, net of tax		(357,838	)		13,525
Net (loss) income	$	(242,119	)	$	237,832

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net premiums earned and net premiums written in 2007 decreased approximately 0.1% and 2.1%, respectively, from 2006.  The premium decreases were principally attributable to a decrease in the number of policies written by the Company’s non-California operations, mostly in New Jersey and Florida, which were experiencing significant competition.  The decrease was partially offset by a slight increase in the average premium collected per policy.  During 2007, the Company implemented no rate changes in California.  In states outside of California, the Company implemented automobile rate increases in two states, automobile rate decreases in four states, and homeowners rate decreases in one state.

Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any effects of reinsurance.  Net premiums written is a statutory measure used to determine production levels.  Net premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that are recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the term of the policies.  The following is a reconciliation of total Company net premiums written to net premiums earned:

	2007		2006
	(Amounts in thousands)
Net premiums written	$	2,982,024	$	3,044,774
Decrease (increase) in unearned premium		11,853		(47,751	)
Net premiums earned	$	2,993,877	$	2,997,023

The loss ratio (GAAP basis) (loss and loss adjustment expenses related to premiums earned) was 68.0% and 67.5% in 2007 and 2006, respectively.  There was negative development of approximately $20 million on prior accident years’ loss reserves in both 2007 and 2006.  Excluding the effect of prior accident years’ loss development, the loss ratio was 67.4% and 66.8% in 2007 and 2006, respectively.  The Southern California fire storms negatively impacted the loss ratio by approximately 0.8% in 2007.

The expense ratio (GAAP basis) (policy acquisition costs and other operating expenses related to premiums earned) was 27.4% and 27.5% in 2007 and 2006, respectively.  The majority of expenses vary directly with premiums.

The combined ratio of losses and expenses (GAAP basis) is the key measure of underwriting performance traditionally used in the property and casualty insurance industry.  A combined ratio under 100% generally reflects profitable underwriting results; a combined ratio over 100% generally reflects unprofitable underwriting results.  The combined ratio of losses and expenses (GAAP basis) was 95.4% and 95.0% in 2007 and 2006, respectively.

The after-tax yield on average investments (fixed maturities, equities and short-term investments valued at cost) was 4.0% on average invested assets of $3.5 billion and 3.8% on average invested assets of $3.3 billion in 2007 and 2006, respectively.

Net investment income was $158.9 million and $151.1 million in 2007 and 2006, respectively.  The after-tax yield on average investments (fixed maturities, equities and short-term investments valued at cost) was 4.0% on average invested assets of $3.5 billion and 3.8% on average invested assets of $3.3 billion in 2007 and 2006, respectively.  The effective tax rate on investment income was 13.3% and 15.5% in 2007 and 2006, respectively.  The lower tax rate in 2007 reflected a shift in the mix of the Company’s portfolio from taxable to non-taxable securities.  Proceeds from bonds which matured or were called totaled $311.7 million and $522.2 million in 2007 and 2006, respectively.  The proceeds were mostly reinvested into securities meeting the Company’s investment profile.

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Net realized investment gains were $20.8 million and $15.4 million in 2007 and 2006, respectively.  Included in the net realized investment gains were investment write-downs of $22.7 million and $2.0 million in 2007 and 2006, respectively, that the Company considered to be other-than-temporarily impaired.  In addition, net realized investment gains included approximately $1.4 million loss and $0 in 2007 and 2006, respectively, related to the change in the fair value of hybrid financial instruments, and approximately $2.0 million gain and $0 in 2007 and 2006, respectively, related to the change in the fair value of trading securities.

The income tax provision for 2006 of $97.6 million was impacted significantly by a $15 million income tax charge relating to the Notices of Proposed Assessments for the tax years 1993 through 1996 (the “NPAs”) that were upheld by the California State Board of Equalization.  Excluding the effect of this income tax charge resulted in an effective tax rate of 24.5% and 26.4% in 2007 and 2006, respectively.  The lower rate in 2007 was primarily attributable to an increased proportion of tax-exempt investment income including tax sheltered dividend income, in contrast to taxable investment income and underwriting income.

Net income was $237.8 million or $4.34 per share (diluted) and $214.8 million or $3.92 per share (diluted) in 2007 and 2006, respectively.  Diluted per share results were based on a weighted average of 54.8 million shares and 54.8 million shares in 2007 and 2006, respectively.  Basic per share results were $4.35 and $3.93 in 2007 and 2006, respectively.  Included in net income were net realized investment gains, net of income tax expense, of $0.25 and $0.18 per share (diluted and basic) in 2007 and 2006, respectively.

Liquidity and Capital Resources

General

The Company is largely dependent upon dividends received from its insurance subsidiaries to pay debt service costs and to make distributions to its shareholders.  Under current insurance law, the Insurance Companies are entitled to pay, without extraordinary approval, ordinary dividends of approximately $136.7 million in 2009.  Extraordinary dividends, as defined by the DOI, require DOI extraordinary approval.  Actual ordinary dividends paid from the Insurance Companies to Mercury General during 2008 were $140 million.  As of December 31, 2008, Mercury General also had approximately $67 million in investments and cash that could be utilized to satisfy its direct holding company obligations.

The principal sources of funds for the Insurance Companies are premiums, sales and maturity of invested assets and dividend and interest income from invested assets.  The principal uses of funds for the Insurance Companies are the payment of claims and related expenses, operating expenses, dividends to Mercury General and the purchase of investments.

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Cash Flows

The Company has generated positive cash flow from operations for over twenty consecutive years.  Because of the Company’s long track record of positive operating cash flows, it does not attempt to match the duration and timing of asset maturities with those of liabilities.  Rather, the Company manages its portfolio with a view towards maximizing total return with an emphasis on after-tax income.  With combined cash and short-term investments of $240.2 million at December 31, 2008, the Company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments.  However, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures.  Accordingly, there can be no assurance that the Company’s sources of funds will be sufficient to meet its liquidity needs or that the Company will not be required to raise additional funds to meet those needs, including future business expansion, through the sale of equity or debt securities or from credit facilities with lending institutions.

Net cash provided from operating activities in 2008 was $63.5 million, a decrease of $152.6 million over the same period in 2007.  This decrease was primarily due to the slowdown in growth of premiums reflecting softening market conditions in personal automobile insurance coupled with an increase in loss and loss adjustment expenses paid in 2008 compared with the same period in 2007.  The Company has utilized the cash provided from operating activities primarily for the purchase and development of information technology such as the NextGen and Mercury First computer systems and the payment of dividends to its shareholders.  Funds derived from the sale, redemption or maturity of fixed maturity investments of $786.5 million, were primarily reinvested by the Company in high grade fixed maturity securities.

The following table shows estimated fair value of fixed maturity securities at December 31, 2008 by contractual maturity in the next five years.

	Fixed maturities
	(Amounts in thousands)
Due in one year or less	$	24,813
Due after one year through two years		26,617
Due after two years through three years		30,758
Due after three years through four years		48,902
Due after four years through five years		102,473
	$	233,563

Invested Assets

An important component of the Company’s financial results is the return on its investment portfolio.  The Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total return framework.  The investment strategy has historically focused on the need for risk-adjusted spread to support the underlying liabilities to achieve return on capital and profitable growth.  The Company believes that investment spread is maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to minimize the effect of downgrades and defaults.  The Company believes that this strategy maintains the investment spread necessary to sustain investment income over time.  The Company’s portfolio management approach utilizes a recognized market risk and asset allocation strategy as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for determining overall below investment grade exposure and diversification requirements.  Within the ranges set by the asset allocation strategy, tactical investment decisions are made in consideration of prevailing market conditions.

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Portfolio Composition

The following table sets forth the composition of the investment portfolio of the Company as of December 31, 2008:

	Amortized cost		Fair value
	(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies	$	9,633	$	9,898
States, municipalities and political subdivisions		2,370,879		2,187,668
Mortgage-backed securities		216,483		202,326
Corporate securities		77,097		65,727
Redeemable preferred stock		54,379		16,054
		2,728,471		2,481,673
Equity securities:
Common stock:
Public utilities		32,293		39,148
Banks, trusts and insurance companies		20,451		11,328
Industrial and other		330,030		186,294
Non-redeemable preferred stock		20,999		10,621
		403,773		247,391
Short-term investments		208,278		204,756
Total investments	$	3,340,522	$	2,933,820

The investment markets have experienced substantial volatility due to uncertainty in the credit markets and a global economic recession which began in late 2007.  In the third and fourth quarters of 2008, asset values experienced severe declines which resulted from extreme volatility in the capital markets and a widening of credit spreads beyond historic norms.  Consequently, during 2008, the Company recognized approximately $550.5 million in net realized investment losses, of which, approximately $274 million was related to fixed maturity securities and approximately $254 million was related to equity securities.  Included in this loss is $531.1 million related to the change in fair value of the total investment portfolio.  As a result of the adoption of SFAS No. 159 on January 1, 2008, the change in unrealized gains and losses on all investments are recorded as realized gains and losses on the consolidated statements of operations.

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Fixed maturity securities

Fixed maturity securities include debt securities and redeemable preferred stocks.  A primary exposure for the fixed maturity securities is interest rate risk.  The longer the duration, the more sensitive the asset is to market interest rate fluctuations.  As assets with longer maturity dates tend to produce higher current yields, the Company’s historical investment philosophy resulted in a portfolio with a moderate duration.  Fixed maturity investment made by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline.  The modified duration of the fixed maturity securities is 7.2 years at December 31, 2008 compared to 4.4 years at December 31, 2007.

Another exposure related to the fixed maturity securities is credit risk, which is managed by maintaining a minimum average portfolio credit quality rating of AA, unchanged from December 31, 2007.  Bond holdings are broadly diversified geographically, within the tax-exempt sector.  Holdings in the taxable sector consist principally of investment grade issues.

As reported for the year ended December 31, 2007, the Company had more than 85% of its fixed maturity assets invested in municipal securities with another 10% invested in AAA-rated mortgage-backed securities and U.S. government bonds.  Less than 5% of its fixed maturity securities were invested in corporate securities at December 31, 2007.  More than half of the Company’s municipal securities were insured by companies with AAA ratings.  The majority of mortgage-backed securities were collateralized by prime borrowers and had AAA ratings.  Uninsured municipal securities had an average credit rating of AA, while insured municipal securities had an underlying average credit rating of AA-.  Due to the strong underlying credit ratings of the Company’s municipal securities, the government backing of most of mortgage-backed securities, and the relatively small corporate security exposure, the Company has been able to maintain a very strong overall credit rating of AA on the fixed maturity portfolio at December 31, 2008.  The following table presents the credit quality rating of the Company’s fixed maturity portfolio by types of security at December 31, 2008 at fair value:

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	December 31, 2008
	(Amounts in thousands)
	AAA			AA				A		BBB			Non Rated/Other			Total
U.S. government bonds and agencies:
Treasuries	$	6,902		$	-		$	-		$	-		$	-		$	6,902
Government Agency		2,996			-			-			-			-			2,996
Total		9,898			-			-			-			-			9,898
		100.0	%														100.0	%
Municipal securities:
Insured *		15,918			597,146			527,395			36,224			19,288			1,195,971
Uninsured		305,455			323,670			161,973			149,909			50,690			991,697
Total		321,373			920,816			689,368			186,133			69,978			2,187,668
		14.7	%		42.1	%		31.5	%		8.5	%		3.2	%		100.0	%
Mortgage-backed securities:
Agencies		164,861			-			-			-			-			164,861
Non-agencies:
Prime		12,050			5,275			3,151			-			713			21,189
Alt-A		10,829			-			1,352			3,422			673			16,276
Total		187,740			5,275			4,503			3,422			1,386			202,326
		92.8	%		2.6	%		2.2	%		1.7	%		0.7	%		100.0	%
Corporate securities:
Communications		-			-			-			5,855			-			5,855
Consumer - cyclical		-			-			-			-			105			105
Energy		-			-			-			-			7,774			7,774
Financial (GSE)		2,297			-			-			-			-			2,297
Financial		9,139			-			20,954			7,496			10,196			47,785
Utilities		-			-			-			-			1,911			1,911
Total		11,436			-			20,954			13,351			19,986			65,727
		17.4	%					31.9	%		20.3	%		30.4	%		100.0	%
Redeemable Preferred stock:
Reverse Convertible		-			2,491			-			-			-			2,491
Corporate - Hybrid (CDO)		-			-			-			-			13,119			13,119
Redeemable Preferred Stock		-			-			-			-			444			444
Total		-			2,491			-			-			13,563			16,054
					15.5	%								84.5	%		100.0	%
Total	$	530,447		$	928,582		$	714,825		$	202,906		$	104,913		$	2,481,673
		21.4	%		37.4	%		28.8	%		8.2	%		4.2	%		100.0	%

* Insured municipal bonds based on underlying ratings: AAA: $7,611, AA: $361,438, A: $581,533, BBB: $73,645, Non rated/Other: $171,744

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Municipal Securities

The Company had approximately $2.2 billion at fair value ($2.4 billion at amortized cost) in municipal bonds at December 31, 2008, which comprised approximately 45% of net losses held in the portfolio.  Approximately half of the municipal bond positions are insured by bond insurers.  For insured municipal bonds that have underlying ratings, the average underlying rating was A+ at December 31, 2008.

MBIA, FSA, AMBAC, ASSURED GTY and RADIAN maintained investment grade ratings at December 31, 2008 while XLCA, CIFG and FGIC were downgraded to below investment grade during 2008.  Many FGIC-insured bonds were reinsured by MBIA.  Based on the uncertainty surrounding the financial condition of these insurers, it is possible that there will be additional downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair value of municipal bonds.  The following table shows the Company’s insured municipal bond portfolio by bond insurer at December 31, 2008:

	December 31,
	2008				2007
Municipal bond insurer	Rating		Fair value		Rating	Fair value
	(Amounts in thousands)
MBIA	BBB		$	606,301	AAA	$	415,098
FSA	AA			205,249	AAA		277,965
AMBAC	BBB			193,701	AAA		220,820
XLCA	CCC			38,393	AAA		41,636
ASSURED GTY	AA			16,664	AAA		16,431
CIFG		B		16,278	AAA		17,972
RADIAN	BBB			15,155	AA		15,918
ACA	NR			13,899	CCC		17,444
FGIC	CCC			9,048	AAA		175,562
Other		N/A		81,283	N/A		85,548
			$	1,195,971		$	1,284,394

The Company considers the strength of the underlying credit as a buffer against potential market value declines which may result from future rating downgrades of the bond insurers.  In addition, the Company has a long-term time horizon for its municipal bond holdings which generally allows it to recover the full principle amounts upon maturity, avoiding forced sales, prior to maturity, of bonds that have declined in market value due to the bond insurers’ rating downgrades.

At December 31, 2008, municipal securities include auction rate securities.  The Company owned $3 million and $18.7 million at fair value of adjustable rate short-term securities, including auction rate securities, at December 31, 2008 and 2007, respectively.

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Mortgage Backed Securities

The entire mortgage-backed securities portfolio is categorized as loans to “prime” borrowers except for approximately $16.3 million ($20.0 million amortized cost) of Alt-A mortgages at December 31, 2008.  Alt-A mortgage backed securities are at fixed or variable rates and include certain securities that are collateralized by residential mortgage loans issued to borrowers with stronger credit profiles than sub-prime borrowers, but do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation.

The average rating of the Company’s Alt-A mortgages is AA and the average rating of the entire mortgage backed securities portfolio is AAA.  The valuation of these securities is based on Level 2 inputs that can be observed in the market.

Corporate Securities

Included in the fixed maturity securities are $65.7 million of fixed rate corporate securities which have a duration of 4.2 years and an overall credit quality rating of A.

Redeemable Preferred Stock

Included in fixed maturities securities are redeemable preferred stock, which represents less than 1% of the total investment portfolio at December 31, 2008, and had an overall credit quality rating less than investment grade.

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Equity securities

Equity holdings consist of non-redeemable preferred stocks and dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion.  The following table summarizes the equity security portfolio by sector for 2008 and 2007:

	December 31,
	2008				2007
	Cost		Fair Value		Cost		Fair Value
	(Amounts in thousands)
Equity securities:
Basic materials	$	15,355	$	5,816	$	7,875	$	8,058
Communications		12,285		8,252		12,288		13,463
Consumer - cyclical		17,305		9,674		14,048		13,056
Consumer - non-cyclical		4,779		3,584		4,044		3,582
Energy		219,397		127,594		150,243		213,563
Financial		33,221		19,709		41,956		40,475
Funds		7,306		5,340		6,663		7,722
Government		5,000		130		5,000		4,750
Industrial		47,810		23,946		40,102		44,278
Technology		8,978		4,157		11,586		11,675
Utilities		32,337		39,189		37,190		67,615
	$	403,773	$	247,391	$	330,995	$	428,237

Short-term investments

At December 31, 2008, short-term investments include money market accounts, options, and short-term bonds which are highly rated short duration securities redeemable on a daily or weekly basis.

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Debt

Effective January 1, 2009, the Company acquired AIS for $120 million.  The acquisition was financed by a $120 million credit facility.  The loan matures on January 2, 2012 with interest payable quarterly at an annual floating rate of LIBOR rate plus 125 basis points.  In addition, the Company may be required to pay up to $34.7 million over the next two years as additional consideration for the AIS acquisition.  The Company plans to fund that portion of the purchase price, if necessary, from cash on hand and cash flow from operations.  On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate plus 125 basis points on the loan for a fixed rate of 3.18%.  The swap is not designated as a hedge.  Changes in the fair value are adjusted through the consolidated statement of operations in the period of change.

In February 2008, the Company acquired an 88,300 square foot office building in Folsom, California for approximately $18.4 million.  The Company financed the transaction through an $18 million secured bank loan.  The loan matures on March 1, 2013 with interest payable quarterly at an annual floating rate of LIBOR plus 50 basis points.  On March 3, 2008, the Company entered into an interest rate swap of its floating LIBOR rate plus 50 basis points on the loan for a fixed rate of 4.25%.  The swap agreement terminates on March 1, 2013.  The swap is designated as a cash flow hedge under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”).  Changes in fair value of the swap are recorded as a component of accumulated other comprehensive income.

On August 7, 2001, the Company completed a public debt offering issuing $125 million of senior notes.  The notes are unsecured, senior obligations of the Company with a 7.25% annual coupon payable on August 15 and February 15 each year commencing February 15, 2002.  These notes mature on August 15, 2011.  The Company used the proceeds from the senior notes to retire amounts payable under existing revolving credit facilities, which were terminated.  Effective January 2, 2002, the Company entered into an interest rate swap of its fixed rate obligation on the senior notes for a floating rate of LIBOR plus 107 basis points.  The swap significantly reduced the interest expense in 2008 and 2007 when the effective interest rate was 3.3% and 6.4%, respectively.  However, if the LIBOR interest rate increases in the future, the Company will incur higher interest expense in the future.  The swap is designated as a fair value hedge under SFAS No. 133.

Share Repurchases

Under the Company’s 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 dividends received from the Company’s insurance subsidiaries that generate cash flow through the sale of lower yielding tax-exempt bonds and internal cash generation. Since the inception of the program in 1998, the Company has purchased 1,266,100 shares of common stock at an average price of $31.36.  The purchased shares were retired.  No stock has been purchased since 2000.

Capital Expenditures

The Company has no direct investment in real estate that it does not utilize for operations.  In February 2008, the Company acquired an 88,300 square foot office building in Folsom, California for approximately $18.4 million.  Since January 2009, when a lease on previously occupied space expired, the building has been occupied by the Company’s Northern California employees.  The Company financed the transaction through an $18 million secured bank loan.

The NextGen project began in 2002 and total capital investment has been approximately $41 million as of December 31, 2008.  The Mercury First project began in 2006 and the total capital investment has been approximately $24 million as of December 31, 2008.  Although the majority of the related software development costs have been expended, there will be some Mercury First development and implementation costs and NextGen implementation costs in the future.

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Contractual Obligations

The Company has obligations to make future payments under contracts and credit-related financial instruments and commitments.  At December 31, 2008, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:

	Payments Due by Period
Contractual Obligations	Total		2009		2010		2011		2012		2013		Thereafter
	(Amounts in thousands)
Debt (including interest)	$	301,395	$	13,644	$	13,644	$	135,217	$	120,765	$	18,125	$	-
Lease obligations		36,693		10,172		9,563		7,550		6,241		2,988		179
Losses and loss adjustment expenses		1,133,508		718,372		276,701		99,269		31,555		7,611		-
Contingent consideration *		34,700		-		17,350		17,350		-		-		-
Total Contractual Obligations	$	1,506,296	$	742,188	$	317,258	$	259,386	$	158,561	$	28,724	$	179

* Based on the projected performance of the AIS business, the Company does not expect to pay the contingent consideration over the two years.

Notes to Contractual Obligations Table:

The interest included in the Company’s debt obligations was calculated using the fixed rates of 7.25% on $125 million of senior notes, 4.25% under an $18 million credit facility, and 3.18% under a $120 million credit facility.  The Company is party to an interest rate swap of its fixed rate on $125 million of senior notes for a floating rate of six month LIBOR plus 107 basis points.  Using the 2008 actual effective annual interest rate of 3.3% for the remaining term of $125 million of senior notes, the total contractual obligations would be approximately $13 million lower than the total debt contractual obligations stated above.

The Company’s outstanding debt contains various terms, conditions and covenants which, if violated by the Company, would result in a default and could result in the acceleration of the Company’s payment obligations thereunder.

Unlike many other forms of contractual obligations, loss and loss adjustment expenses do not have definitive due dates and the ultimate payment dates are subject to a number of variables and uncertainties. As a result, the total loss and loss adjustment expense payments to be made by period, as shown above, are estimates.

The table excludes FIN No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”) liabilities of $5 million related to uncertainty in tax settlements as the Company is unable to reasonably estimate the timing of related future payments.

The table excludes the contingent consideration arrangement related to the AIS acquisition.

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Regulatory Capital Requirement

The NAIC utilizes a risk-based capital formula for casualty insurance companies which establishes recommended minimum capital requirements that are compared to the Company’s actual capital level.  The formula was 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 calculated the risk-based capital requirements of each of the Insurance Companies as of December 31, 2008.  The policyholders’ statutory surplus of each of the Insurance Companies exceeded the highest level of minimum required capital.

Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to statutory policyholders’ surplus should not exceed 3.0 to 1.  Based on the combined surplus of all the Insurance Companies of $1,371.1 million at December 31, 2008, and net premiums written of $2,750.2 million, the ratio of premium writings to surplus was 2.0 to 1.

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

The Company is subject to various market risk exposures.  Primary market risk exposures are to changes in interest rates, equity prices and credit risk.  Adverse changes to these rates and prices may occur due to changes in the liquidity of a market, or to changes in market perceptions of credit worthiness and risk tolerance.  The following disclosure reflects estimates of future performance and economic conditions.  Actual results may differ.

Overview

The Company’s investment policies define the overall framework for managing market and investment risks, including accountability and controls over risk management activities, and specify the investment limits and strategies that are appropriate given the liquidity, surplus, product profile and regulatory requirements of the subsidiary.  Executive oversight of investment activities is conducted primarily through the investment committee.  The investment committee focuses on strategies to enhance yields, mitigate market risks and optimize capital to improve profitability and returns.

The Company manages exposures to market risk through the use of asset allocation, duration, credit ratings, and value-at-risk limits.  Asset allocation limits place restrictions on the total funds that may be invested within an asset class. Duration limits on the fixed maturities portfolio place restrictions on the amount of interest rate risk that may be taken.  Value-at-risk limits are intended to restrict the potential loss in fair value that could arise from adverse movements in the fixed maturities and equity markets based on historical volatilities and correlations among market risk factors.  Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by investment policies.

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Interest rate risk

Interest rate risk is the risk that the Company will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of interest bearing assets and liabilities.  This risk arises from many of its primary activities, as the Company invests substantial funds in interest sensitive assets and issues interest sensitive liabilities.  Interest rate risk includes risks related to changes in U.S. Treasury yields and other key benchmarks as well as changes in interest rates resulting from the widening credit spreads and credit exposure to collateralized securities.

The Company invests its assets primarily in fixed maturity investments, which at December 31, 2008 comprised approximately 85% of total investments at fair value.  Tax-exempt bonds represent 88% of the fixed maturity investments with the remaining amount consisting of sinking fund preferred stocks and taxable bonds.  Equity securities account for approximately 8.4% of total investments at fair value.  The remaining 6.6% of the investment portfolio consists of highly liquid short-term investments which are primarily 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 increases and vice versa.  A common measure of the interest sensitivity of fixed maturity assets is modified duration, a calculation that utilizes 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 historical investment philosophy resulted in a portfolio with a moderate duration.  Bond investments made by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline.  The increase in municipal bond credit spreads in 2008 caused the overall market interest rate to increase, which resulted in the increase in the duration of the Company’s portfolio.  Consequently, the modified duration of the bond portfolio is 7.2 years at December 31, 2008 compared to 4.4 years and 4.0 years at December 31, 2007 and 2006, respectively.  Given a hypothetical parallel increase of 100 basis or 200 basis points in interest rates, the fair value of the bond portfolio at December 31, 2008 would decrease by approximately $179 million or $357 million, respectively.

Effective January 2, 2002, the Company entered into an interest rate swap of its fixed rate obligation on its $125 million fixed 7.25% rate senior notes for a floating rate.  The interest rate swap has the effect of hedging the fair value of the senior notes.

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Equity price risk

Equity price risk is the risk that the Company will incur losses due to adverse changes in the general levels of the equity markets.

At December 31, 2008, the Company’s primary objective for common equity investments is current income.  The fair value of the equity investment consists of $236.8 million in common stocks and $10.6 million in non-sinking fund preferred stocks.  The common stock equity assets are typically valued for future economic prospects as perceived by the market.

The common equity portfolio represents approximately 8.1% of total investments at fair value.  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 1.14.  Based on a hypothetical 25% or 50% reduction in the overall value of the stock market, the fair value of the common stock portfolio would decrease by approximately $67 million or $135 million, respectively.

Credit risk

Credit risk is risk due to uncertainty in a counterparty’s ability to meet its obligations.  Credit risk is managed by maintaining a minimum average fixed maturities portfolio credit quality rating of AA, unchanged from December 31, 2007.  Historically, the ten-year default rate per Moody’s for AA-rated municipal bonds has been less than 1%.  The Company’s bond holdings are broadly diversified geographically, within the tax-exempt sector,  representing approximately 88% of fixed maturity securities at December 31, 2008 at fair value.  Remaining fixed maturity securities in the taxable sector consist principally of investment grade issues, of which approximately 59% represents U.S. government bonds and agencies, which were rated at AAA at December 31, 2008.  The Company believes that its conservative approach to credit risk has served it well in the current economic climate, allowing for a competitive advantage over many insurers exposed to such risk.

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Forward-looking statements

Certain statements in this report on Form 10-K or in other materials the Company has filed or will file with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain or may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements may address, among other things, the Company’s strategy for growth, business development, regulatory approvals, market position, expenditures, financial results and reserves.  Forward-looking statements are not guarantees of performance and are subject to important factors and events that could cause the Company’s actual business, prospects and results of operations to differ materially from the historical information contained in this Form 10-K and from those that may be expressed or implied by the forward-looking statements contained in the this Form 10-K and in other reports or public statements made by us.

Factors that could cause or contribute to such differences include, among others: the competition currently existing in the California automobile insurance markets; the cyclical and general competitive nature of the property and casualty insurance industry and general uncertainties regarding loss reserve or other estimates, the accuracy and adequacy of the Company’s pricing methodologies; a successful integration of the operations of AIS and the achievement of the synergies and revenue growth from the acquisition of AIS; the Company’s success in managing its business in states outside of California; the impact of potential third party “bad-faith” legislation, changes in laws or regulations, tax position challenges by the California Franchise Tax Board, and decisions of courts, regulators and governmental bodies, particularly in California; the Company’s ability to obtain and the timing of the approval of premium rate changes for private passenger automobile policies issued in states where the Company does business; the investment yields the Company is able to obtain with its investments in comparison to recent yields and the general market risk associated with the Company’s investment portfolio, including the impact of the current liquidity crisis and economic weakness on the Company’s market and investment portfolio; uncertainties related to assumptions and projections generally, inflation and changes in economic conditions; changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs; adverse weather conditions or natural disasters in the markets served by the Company; the stability of the Company’s information technology systems and the ability of the Company to execute on its information technology initiatives; the Company’s ability to realize current deferred tax assets or to hold certain securities with current loss positions to recovery or maturity; and other uncertainties, all of which are difficult to predict and many of which are beyond the Company’s control.  GAAP prescribes when a Company may reserve for particular risks including litigation exposures.  Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency.  Reported results may therefore appear to be volatile in certain periods.

From time to time, forward-looking statements are also included in the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K, in press releases, in presentations, on its web site and in other materials released to the public.  The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-K or, in the case of any document incorporated by reference, any other report filed with the SEC or any other public statement made by us, the date of the document, report or statement. Investors should also understand that it is not possible to predict or identify all factors and should not consider the risks set forth above to be a complete statement of all potential risks and uncertainties.  If the expectations or assumptions underlying the Company’s forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those predicted in any forward-looking statements.  The factors identified above are believed to be some, but not all, of the important factors that could cause actual events and results to be significantly different from those that may be expressed or implied in any forward-looking statements.  Any forward-looking statements should also be considered in light of the information provided in “Item 1A. Risk Factors.”

65

Quarterly Financial Information

Summarized quarterly financial data for 2008 and 2007 is as follows (in thousands except per share data):

	Quarter Ended
	March 31			June 30		Sept. 30			Dec. 31
2008
Net premiums earned	$	720,916		$	711,204	$	696,605		$	680,114
Change in fair value of investments pursuant to
the adoption of SFAS No. 159	$	(93,287	)	$	22,574	$	(254,121	)	$	(186,602	)
(Loss) Income before income taxes	$	(19,067	)	$	96,256	$	(253,318	)	$	(274,732	)
Net (loss) income	$	(3,961	)	$	70,726	$	(140,539	)	$	(168,345	)
Basic earnings per share	$	(0.07	)	$	1.29	$	(2.57	)	$	(3.07	)
Diluted earnings per share	$	(0.07	)	$	1.29	$	(2.57	)	$	(3.07	)
Dividends declared per share	$	0.58		$	0.58	$	0.58		$	0.58
2007
Net premiums earned	$	755,752		$	754,076	$	748,798		$	735,251
Income before income taxes	$	81,499		$	95,117	$	83,675		$	54,745
Net income	$	60,453		$	69,509	$	63,278		$	44,592
Basic earnings per share	$	1.11		$	1.27	$	1.16		$	0.81
Diluted earnings per share	$	1.10		$	1.27	$	1.15		$	0.81
Dividends declared per share	$	0.52		$	0.52	$	0.52		$	0.52

Net income during 2008 was largely affected by changes in the fair value of the investment portfolio measured at fair value pursuant to SFAS No. 159.  As a result of the adoption of SFAS No. 159 on January 1, 2008, the change in unrealized gains and losses on all investments are recorded as realized gains and losses on the statements of operations.  During 2008, the investment markets have experienced substantial volatility due to uncertainty in the credit markets and a global economic recession.  In the third and fourth quarters of 2008, this uncertainty developed into a credit crisis that led to extreme volatility in the capital markets, a widening of credit spreads beyond historic norms and a significant decline in asset values across most asset categories.

66

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firm		68
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2008 and 2007		70
Consolidated Statements of Operations for Each of the Years in the Three-Year Period
Ended December 31, 2008		71
Consolidated Statements of Comprehensive (Loss) Income for Each of the Years in the Three-Year Period
Ended December 31, 2008		72
Consolidated Statements of Shareholders' Equity for Each of the Years in the Three-Year Period
Ended December 31, 2008		73
Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period
Ended December 31, 2008		74
Notes to Consolidated Financial Statements		75

67

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2008 and 2007, and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. 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 the standards of the Public Company Accounting Oversight Board (United States).  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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mercury General Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2009  expressed an unqualified opinion on the effectiveness of Mercury General Corporation and subsidiaries’  internal control over financial reporting.

As discussed in Note 1 to the consolidated financial statements, the Company has adopted the provisions of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, as of January 1, 2008.

/s/ KPMG LLP

Los Angeles, California

February 27, 2009

68

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Mercury General Corporation:

We have audited Mercury General Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Mercury General Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Mercury General Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive (loss) income, and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated February 27, 2009 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Los Angeles, California

February 27, 2009

69

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

(Amounts in thousands, except share data)

ASSETS	2008			2008
Investments:
Fixed maturities trading, at fair value (amortized cost $2,728,471)	$	2,481,673		$	-
Fixed maturities available for sale, at fair value (amortized cost $2,860,455)		-			2,887,760
Equity securities available for sale, at fair value (cost $317,869)		-			413,123
Equity securities trading, at fair value (cost $403,773; $13,126)		247,391			15,114
Short-term investments, at fair value in 2008; at cost in 2007 (cost $208,278 in 2008)		204,756			272,678
Total investments		2,933,820			3,588,675
Cash		35,396			48,245
Receivables:
Premiums receivable		268,227			294,663
Premium notes		25,699			27,577
Accrued investment income		36,540			36,436
Other		9,526			9,010
Total receivables		339,992			367,686
Deferred policy acquisition costs		200,005			209,805
Fixed assets, net		191,777			172,357
Current income taxes		43,378			-
Deferred income taxes		171,025			-
Other assets		34,802			27,728
Total assets	$	3,950,195		$	4,414,496
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses		1,133,508			1,103,915
Unearned premiums		879,651			938,370
Notes payable		158,625			138,562
Accounts payable and accrued expenses		93,864			125,755
Current income taxes		-			3,150
Deferred income taxes		-			30,852
Other liabilities		190,496			211,894
Total liabilities		2,456,144			2,552,498
Commitments and contingencies
Shareholders' equity:
Common stock without par value or stated value:
Authorized 70,000,000 shares; issued and outstanding 54,763,713 in 2008
and 54,729,913 shares in 2007		71,428			69,369
Accumulated other comprehensive (loss) income		(876	)		80,557
Retained earnings		1,423,499			1,712,072
Total shareholders' equity		1,494,051			1,861,998
Total liabilities and shareholders' equity	$	3,950,195		$	4,414,496

See accompanying notes to consolidated financial statements.

70

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,

(Amounts in thousands, except per share data)

	2008			2007		2006
Revenues:
Net premiums earned	$	2,808,839		$	2,993,877	$	2,997,023
Net investment income		151,280			158,911		151,099
Net realized investment (losses) gains		(550,520	)		20,808		15,436
Other		4,597			5,154		5,185
Total revenues		2,414,196			3,178,750		3,168,743
Expenses:
Losses and loss adjustment expenses		2,060,409			2,036,644		2,021,646
Policy acquisition costs		624,854			659,671		648,945
Other operating expenses		174,828			158,810		176,563
Interest		4,966			8,589		9,180
Total expenses		2,865,057			2,863,714		2,856,334
(Loss) Income before income taxes		(450,861	)		315,036		312,409
Income tax (benefit) expense		(208,742	)		77,204		97,592
Net (loss) income	$	(242,119	)	$	237,832	$	214,817
Basic earnings per share	$	(4.42	)	$	4.35	$	3.93
Diluted earnings per share	$	(4.42	)	$	4.34	$	3.92

See accompanying notes to consolidated financial statements.

71

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Years ended December 31,

(Amounts in thousands)

	2008			2007			2006
Net (loss) income	$	(242,119	)	$	237,832		$	214,817
Other comprehensive income (loss), before tax:
Losses on hedging instrument		(1,348	)		-			-
Unrealized gains on securities:
Unrealized holding gains arising during period		-			25,583			12,144
Less: reclassification adjustment for net gains included in net income		-			(8,800	)		(7,373	)
Other comprehensive income (loss), before tax		(1,348	)		16,783			4,771
Income tax benefit related to losses on hedging instrument		(472	)		-			-
Income tax expense related to unrealized holding gains
arising during period		-			8,958			4,248
Income tax benefit related to reclassification adjustment for net
gains included in net income		-			(3,080	)		(2,580	)
Comprehensive (loss) income, net of tax	$	(242,995	)	$	248,737		$	217,920

See accompanying notes to consolidated financial statements.

72

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years ended December 31,

(Amounts in thousands)

	2008			2007			2006
Common stock, beginning of year	$	69,369		$	66,436		$	63,103
Proceeds of stock options exercised		1,286			2,173			1,943
Share-based compensation expense		652			487			885
Tax benefit on sales of incentive stock options		121			273			505
Common stock, end of year		71,428			69,369			66,436
Accumulated other comprehensive income, beginning of year		80,557			69,652			66,549
Net increase (decrease) in other comprehensive income, net of tax		(81,433	)		10,905			3,103
Accumulated other comprehensive (loss) income, end of year		(876	)		80,557			69,652
Retained earnings, beginning of year		1,712,072			1,588,042			1,478,185
Cumulative effect of accounting changes, net of tax		80,557			-			-
Net (loss) income		(242,119	)		237,832			214,817
Dividends paid to shareholders		(127,011	)		(113,802	)		(104,960	)
Retained earnings, end of year		1,423,499			1,712,072			1,588,042
Total shareholders' equity	$	1,494,051		$	1,861,998		$	1,724,130

See accompanying notes to consolidated financial statements.

73

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

(Amounts in thousands)

	2008			2007			2006
Cash flows from operating activities:
Net (loss) income	$	(242,119	)	$	237,832		$	214,817
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization		27,037			26,324			24,262
Net realized investment losses (gains)		550,520			(20,808	)		(15,436	)
Bond amortization, net		12,263			7,414			4,701
Excess tax benefit from exercise of stock options		(121	)		(273	)		(505	)
Decrease (increase) in premiums receivable		26,436			4,109			(13,989	)
Decrease (increase) in premiums notes receivable		1,878			2,036			(2,611	)
Decrease (increase) in deferred policy acquisition costs		9,800			(22	)		(11,840	)
Increase in unpaid losses and loss adjustment expenses		29,593			15,093			66,219
(Decrease) increase in unearned premiums		(58,719	)		(11,974	)		47,777
(Decrease) increase in liability for taxes		(247,812	)		(21,817	)		24,435
Decrease in accounts payable and accrued expenses		(30,816	)		(12,264	)		2,741
Decrease (increase) in trading securities in nature, net of realized gains and losses		3,463			(10,101	)		-
Share-based compensation		652			487			886
Decrease in other payables		(11,969	)		(1,860	)		(4,739	)
Other, net		(5,485	)		1,120			29,686
Net cash provided by operating activities		64,601			215,296			366,404
Cash flows from investing activities:
Fixed maturities available for sale in nature:
Purchases		(673,231	)		(1,782,206	)		(2,701,195	)
Sales		550,687			1,442,863			1,912,718
Calls or maturities		235,846			311,714			522,193
Equity securities available for sale in nature:
Purchases		(386,585	)		(578,573	)		(429,564	)
Sales		282,650			546,314			404,730
Net (decrease) increase in payable for securities		(1,050	)		(5,141	)		949
Net decrease in short-term investments		68,002			9,624			38,747
Purchase of fixed assets		(48,513	)		(41,211	)		(43,852	)
Sale of fixed assets		1,514			1,110			529
Other, net		5,334			3,455			8,675
Net cash provided by (used in) investing activities		34,654			(92,051	)		(286,070	)
Cash flows from financing activities:
Dividends paid to shareholders		(127,011	)		(113,802	)		(104,960	)
Excess tax benefit from exercise of stock options		121			273			505
Repayment of debt		(4,500	)		(11,250	)		-
Proceeds from stock options exercised		1,286			2,173			1,943
Proceeds from bank loan		18,000			-			-
Net cash used in financing activities		(112,104	)		(122,606	)		(102,512	)
Net (decrease) increase in cash		(12,849	)		639			(22,178	)
Cash:
Beginning of the year		48,245			47,606			69,784
End of year	$	35,396		$	48,245		$	47,606

See accompanying notes to consolidated financial statements.

74

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 and 2007

(1)  Significant Accounting Policies

Principles of Consolidation and Presentation

The Company operates primarily as a private passenger automobile insurer selling policies through a network of independent agents and brokers in thirteen states.  The Company also offers homeowners insurance, commercial automobile and property insurance, mechanical breakdown insurance, commercial and dwelling fire insurance and umbrella insurance.  The private passenger automobile lines of insurance exceeded 83% of the Company’s direct premiums written in 2008, 2007 and 2006, with approximately 80%, 79% and 75% of the private passenger automobile premiums written in the state of California during 2008, 2007 and 2006, respectively.

The consolidated financial statements include the accounts of Mercury General and its directly and indirectly wholly owned insurance and non-insurance subsidiaries.  The insurance subsidiaries are MCC, MIC, CAIC, CGU, MIC IL, MIC GA, MID GA, MNIC, AMI, AML, MCM, MIC FL and MID AM.  The non-insurance subsidiaries are MSMC, AMMGA, Concord, MIS LLC and MGI.  AML is not owned by the Company, but is controlled by the Company through its attorney-in-fact, MSMC.  MCM is not owned by the Company, but is controlled through a management contract and therefore its results are included in the consolidated financial statements.  The consolidated financial statements have been prepared in conformity with 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 GAAP 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.

Investments

Effective January 1, 2008, the Company adopted SFAS No. 159.  SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at fair value.  Entities that elect the fair value option report unrealized gains and losses in earnings at each subsequent reporting date.  The Company elected to apply the fair value option of SFAS No. 159 to all short-term investments and all available-for-sale fixed maturity and equity securities existing at the time of adoption and similar securities acquired subsequently unless otherwise noted at the time when the eligible item is first recognized, including hybrid financial instruments with embedded derivatives that would otherwise need to be bifurcated.

Effective January 1, 2008, the losses due to changes in fair value for items measured at fair value pursuant to election of the fair value option are included in net realized investment gains (losses) in the Company’s consolidated statements of operations.  Interest and dividend income on the investment holdings is recognized on an accrual basis on each measurement date and is included in net investment income in the Company’s consolidated statements of operations.

75

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”).  SFAS No. 155 permits hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation to irrevocably be accounted for at fair value, with changes in fair value recognized in the statement of operations.  The Company adopted SFAS No. 155 on January 1, 2007.  As SFAS No. 159 incorporates accounting and disclosure requirements that are similar to those of SFAS No. 155, effective January 1, 2008, SFAS No. 159 rather than SFAS No. 155 is applied to the Company’s fair value elections for hybrid financial instruments.

Fixed maturity securities include debt securities and redeemable preferred stocks, which may have fixed or variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of the Company’s asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs, tax planning considerations or other economic factors.  Fixed maturity securities are reported at fair value.  Prior to the adoption of SFAS No. 159, these securities were carried at fair value with the corresponding unrealized gains (losses), net of deferred income taxes, reported in accumulated other comprehensive income.  Premiums and discounts on fixed maturities are amortized using first call date and are adjusted for anticipated prepayments.  Mortgage-backed securities at amortized cost are adjusted for anticipated prepayment using the prospective method.  Equity holdings, including non-redeemable fund preferred stocks, are with minor exceptions, actively traded on national exchanges and are valued at the last transaction price on the balance sheet date.

Equity securities include common stocks, nonredeemable preferred stocks and other risk investments and are reported at quoted fair values.  Prior to the adoption of SFAS No. 159, changes in fair value of these securities, net of deferred income taxes, were reflected as unrealized gains and losses in accumulated other comprehensive income.

Prior to the adoption of SFAS No. 159, when a decline in value of fixed maturities or equity securities was considered other than temporary, a loss was recognized in the consolidated statements of operations.  Realized capital gains and losses were included in the consolidated statements of operations based upon the specific identification method.

Short-term investments include money market accounts, options and short-term bonds expected to mature within one year.  Prior to the adoption of SFAS No. 159, short-term bonds were carried at cost, which approximated fair value.  Effective January 1, 2008, short-term investments are reported at fair value.  As of December 31, 2008, liabilities for covered call options of $2.8 million and short sales of $2.5 million were included in other liabilities.

The Company writes covered call options through listed and over-the-counter exchanges.  When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written.  Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments.  If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss.  The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option.

Fair Value of Financial Instruments

As discussed above, all investments, including short-term investments, are carried on the balance sheet at fair value.  The carrying amounts and fair values for investment securities are disclosed in Note 2 of Notes to Consolidated Financial Statements and were drawn from standard trade data sources such as market and broker quotes, with the exception of $3 million of fixed maturities, at fair value at December 31, 2008, for which management determined fair value estimates using discounted cash flow models.  The carrying value of receivables, accounts payable and accrued expenses and other liabilities is equivalent to the estimated fair value of those items.

76

Premium Income Recognition

Insurance premiums are recognized as income ratably over the term of the policies in proportion to the amount of insurance protection provided.  Unearned premiums are computed on a monthly pro rata basis.  Unearned premiums are stated gross of reinsurance deductions, with the reinsurance deduction recorded in other assets and other receivables.  Net premiums of $2.75 billion, $2.98 billion, and $3.04 billion were written in 2008, 2007 and 2006, respectively.

No agent or broker accounted for more than 2% of direct premiums written except AIS which produced approximately 15%, 14% and 13% during 2008, 2007, and 2006, respectively, of the Company’s direct premiums written.  Effective January 1, 2009, MCC acquired all of the membership interests of AIS Management LLC, a California limited liability company, which is the parent company of AIS and PoliSeek AIS Insurance Solutions, Inc.

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 down payment 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, and which vary directly with and are directly related to the production of business, are deferred and amortized to expense 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.

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 estimates 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 required.  Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of repair materials or labor rates can impact ultimate claim costs.  In addition, time can be a critical part of reserving determinations since the longer the span between the occurrence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be.  Accordingly, short-tail 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 for loss reserves are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.

The Company analyzes loss reserves quarterly primarily using the incurred loss development, average severity and claim count development methods described below. The Company also uses the paid loss development method to analyze loss adjustment expense reserves and industry claims data as part of its reserve analysis. When deciding which method to use in estimating its reserves, the Company and its actuaries evaluate the credibility of each method based on the maturity of the data available and the claims settlement practices for each particular line of business or coverage within a line of business. When establishing the reserve, the Company will generally analyze the results from all of the methods used rather than relying on one method. While these methods are designed to determine the ultimate losses on claims under the Company’s policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes. The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.

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• The incurred loss development method analyzes historical incurred case loss (case reserves plus paid losses) development to estimate ultimate losses. The Company applies development factors against current case incurred losses by accident period to calculate ultimate expected losses. The Company believes that the incurred loss development method provides a reasonable basis for evaluating ultimate losses, particularly in the Company’s larger, more established lines of business which have a long operating history.

• The claim count development method analyzes historical claim count development to estimate future incurred claim count development for current claims. The Company applies these development factors against current claim counts by accident period to calculate ultimate expected claim counts.

• The average severity method analyzes historical loss payments and/or incurred losses divided by closed claims and/or total claims to calculate an estimated average cost per claim. From this, the expected ultimate average cost per claim can be estimated. The average severity method coupled with the claim count development method provides meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing reserves.

• The paid loss development method analyzes historical payment patterns to estimate the amount of losses yet to be paid. The Company primarily uses this method for loss adjustment expenses because specific case reserves are generally not established for loss adjustment expenses.

In states with little operating history where there is insufficient claims data to prepare a reserve analysis relying solely on Company historical data, the Company generally projects ultimate losses using industry average loss data or expected loss ratios. As the Company develops an operating history in these states, the Company will rely increasingly on the incurred loss development and average severity and claim count development methods. The Company analyzes catastrophe losses separately from non-catastrophe losses. For these losses, the Company determines claim counts based on claims reported and development expectations from previous catastrophes and applies an average expected loss per claim based on reserves established by adjusters and average losses on previous storms.

Goodwill

Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired.  The Company annually evaluates goodwill for impairment using widely accepted valuation techniques to estimate the fair value of its reporting units.  The Company also reviews its goodwill for impairment whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill may exceed its implied fair value.  Goodwill impairment evaluations indicated no impairment at December 31, 2008.

Depreciation and Amortization

Buildings are stated at the lower of cost or fair value and depreciated on a straight line basis over 30 years. Furniture and equipment and purchased software are stated at cost and depreciated on a combination of straight-line and accelerated methods over 3 to 10 years. Automobiles are depreciated over 5 years, using an accelerated method.  Internally developed computer software is capitalized in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and amortized on a straight-line method over the estimated useful life of the software, not exceeding five years.  Leasehold improvements are stated at cost and amortized over the life of the associated lease.

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Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with SFAS No. 133, as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  SFAS No. 133 establishes accounting and reporting standards requiring that all derivative instruments, other than those that meet the normal purchases and sales exception, be recorded on the balance sheet as either an asset or liability measured at fair value which is generally based on information obtained from independent parties.  SFAS No. 133 also requires that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met.  The Company’s derivative instruments include interest rate swap agreements and are used to hedge the exposure to:

• Changes in fair value of an asset or liability (fair value hedge);

• Variable cash flows of a forecasted transaction (cash flow hedge).

At December 31, 2008, the Company held one fair value hedge and one cash flow hedge, compared to one fair value hedge at December 31, 2007.

Derivatives designated as hedges are evaluated based on established criteria to determine the effectiveness of their correlation to, and ability to reduce the designated risk of specific securities or transactions.  Effectiveness is reassessed on a quarterly basis.  Hedges that are deemed to be effective are accounted for as follows:

• Fair value hedge:  changes in fair value of the hedging instrument, as well as the hedged item, are recognized in income in the period of change.

• Cash flow hedge:  changes in fair value of the hedging instrument are reported as a component of accumulated other comprehensive income and subsequently amortized into earnings over the life of the hedged transactions.

If a hedge is deemed to become ineffective, it is accounted for as follows:

• Fair value hedge:  changes in fair value of the hedging instrument, as well as the hedged item, are recognized in earnings for the current period.

• Cash flow hedge:  changes in fair value of the hedging instrument are reported in earnings for the current period. If it is determined that a hedging instrument no longer meets the Company’s risk reduction and correlation criteria, or if the hedging instrument expires, any accumulated balance in other comprehensive income is recognized in earnings in the period of determination.

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Earnings Per Share

Earnings per share is presented in accordance with the provisions of SFAS No. 128, “Earnings per Share,” which requires presentation of basic and diluted earnings per share for all publicly traded companies.  Basic earnings per share is computed based on the weighted average number of common shares outstanding.  Diluted earnings per share is computed based on the weighted average number of common and dilutive potential common shares outstanding.  At December 31, 2008, potential dilutive common shares consist of outstanding stock options.  Note 13 of Notes to Consolidated Financial Statements contains the required disclosures relating to the calculation of basic and diluted earnings per share.

Segment Reporting

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about a public business enterprise’s operating segments.  Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance.  The Company does not have any operations that require separate disclosure as reportable operating segments for the periods presented.

The annual direct premiums written attributable to private passenger and commercial automobile, homeowners and other lines of insurance were as follows:

	Year ended December 31,
	2008		2007		2006
	(Amounts in thousands)
Private Passenger Automobile	$	2,304,237	$	2,496,572	$	2,559,566
Commercial Automobile		107,143		123,459		142,508
Homeowners		234,033		235,006		222,277
Other lines		106,481		127,657		127,739
Total	$	2,751,894	$	2,982,694	$	3,052,090

Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and expected benefits of utilizing net operating loss and tax credit carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled, and reflected in the financial statements in the period enacted.  At December 31, 2008, the Company’s deferred income taxes were in a net asset position, compared to a net liability position at December 31, 2007.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax-planning strategies in making this assessment.  Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

Reinsurance

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 receivables.  Earned premiums are stated net of deductions for ceded reinsurance.

The Insurance Companies, as primary insurers, are required to pay losses to the extent reinsurers are unable to discharge their obligations under the reinsurance agreements.

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Share-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”).  Under the modified prospective transition method, share-based compensation expense includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”  Share-based compensation expense for all share-based payment awards granted or modified on or after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.  The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is the option vesting term of five years for options granted prior to 2008 and four years for options granted subsequent to January 1, 2008, for only those shares expected to vest.  The fair value of stock option awards was estimated using the Black-Scholes option pricing model with the grant-date assumptions and weighted-average fair values, as discussed in Note 12 of Notes to Consolidated Financial Statements.

Recently Issued Accounting Standards

Effective January 1, 2008, the Company adopted SFAS No. 157 for financial assets and liabilities.  In December 2007, the FASB provided a one-year deferral of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis, at least annually.  SFAS No. 157 redefines fair values as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  Specifically, SFAS No. 157 establishes a three-level hierarchy for fair value measurements based upon the nature of the inputs to the valuation of an asset or liability.  SFAS No. 157 applies where other accounting pronouncements require or permit fair value measurements.  In October 2008, the FASB issued FASB Staff Position No. 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  Such considerations include inputs to broker quotes, assumptions regarding future cash flows and use of risk-adjusted discount rates.  The adoption of FSP FAS No. 157-3 did not have a material impact on the Company’s consolidated financial statements.

As discussed above, effective January 1, 2008, the Company adopted SFAS No. 159, which establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement alternatives for similar types of financial assets and liabilities.  The standard also requires additional information to aid financial statement users’ understanding of the impacts of a reporting entity’s decision to use fair value on its earnings and requires entities to display, on the face of the statement of financial position, the fair value of those assets and liabilities which the reporting entity has chosen to measure at fair value.  The Company elected to apply the fair value option of SFAS No. 159 to all short-term investments and all available-for-sale fixed maturity and equity securities existing at the time of adoption and similar securities acquired subsequently unless otherwise noted at the time when the eligible item is first recognized, including hybrid financial instruments with embedded derivatives that would otherwise need to be bifurcated.  The primary reasons for electing the fair value option were simplification and cost-benefit considerations as well as expansion of use of fair value measurement consistent with the long-term measurement objectives of the FASB for accounting for financial instruments.

The transition adjustment to beginning retained earnings related to the adoption of SFAS No. 159 was a gain of $80.5 million, net of deferred taxes of $43.3 million, all of which related to applying the fair value option to fixed maturity and equity securities available for sale.  This adjustment was reflected as a reclassification of accumulated other comprehensive income to retained earnings.  Both the fair value and carrying value of such securities were $3.3 billion on January 1, 2008, immediately prior to the adoption of the fair value option.

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Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007), “Business Combinations” ("SFAS No. 141(R)").  While SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141, “Business Combinations” (“SFAS No. 141”), that the acquisition method (referred to as the purchase method in SFAS No. 141) be used for all business combinations and for an acquirer to be identified for each business combination, SFAS No. 141(R) significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, and acquisition costs.  SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date.  This replaces the cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values.  Additionally, SFAS No. 141(R) requires costs incurred to effect the acquisition to be recognized separately from the acquisition rather than included in the cost allocated to the assets acquired and liabilities assumed.  SFAS No. 141(R) requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual, which in most types of business combinations will result in measuring goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired.  In addition, under SFAS No. 141(R), changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period impact income tax expense.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”).  SFAS No. 161 amends SFAS No. 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities, but does not change the scope of accounting of SFAS No. 133.  SFAS No. 161 requires increased qualitative disclosures such as how and why an entity is using a derivative instrument; how the entity is accounting for its derivative instrument and hedged items under SFAS No. 133 and its related interpretations; and how the instrument affects the entity’s financial position, financial performance, and cash flows.  Quantitative disclosures should include information about the fair value of the derivative instruments, including gains and losses, and should contain more detailed information about the location of the derivative instrument in the entity’s financial statements.  Credit-risk disclosures should include information about the existence and nature of credit-risk-related contingent features included in derivative instruments. Credit-risk-related contingent features can be defined as those that require entities, upon the occurrence of a credit event such as a credit rating downgrade, to settle derivative instruments or post collateral.  The Company adopted SFAS No. 161 on January 1, 2009.  The adoption of SFAS No. 161 is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (“GAAP hierarchy”). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles,” has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process.  SFAS No. 162 became effective in 2008 and did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No.142, “Goodwill and Other Intangible Assets.”  FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008.  The Company adopted FSP FAS 142-3 on January 1, 2009.  The adoption of FSP FAS 142-3 did not have a material impact on the Company’s consolidated financial statements.

Reclassifications

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

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(2)  Investments and Investment Income

Investment Income

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

	Year ended December 31,
	2008		2007		2006
	(Amounts in thousands)
Interest and dividends on fixed maturities	$	138,287	$	141,021	$	130,339
Dividends on equity securities		9,431		9,476		8,152
Interest on short-term investments		5,582		13,452		15,557
Total investment income		153,300		163,949		154,048
Investment expense		2,020		5,038		2,949
Net investment income	$	151,280	$	158,911	$	151,099

Realized Investment Gains and Losses

Effective January 1, 2008, the losses due to changes in fair value for items measured at fair value pursuant to the Company’s election of the fair value option are included in net realized investment gains and losses in the Company’s consolidated statements of operations.

The following table presents losses due to changes in fair value for items measured at fair value pursuant to election of the fair value option under SFAS No. 159:

	Year ended December 31,
	2008
	(Amounts in thousands)
Fixed maturity securities	$	(274,103	)
Equity securities		(251,644	)
Short-term investments		3
Total	$	(525,744	)

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

	Year ended December 31,
	2008			2007			2006
	(Amounts in thousands)
Net realized (losses) gains from investments and other liabilities:
Fixed maturities	$	(280,522	)	$	(12,830	)	$	(3,611	)
Equity securities		(281,316	)		32,141			9,283
Short-term investments		(4,177	)		(8,342	)		(2,832	)
Other liabilities *		15,495			9,839			12,596
Total	$	(550,520	)	$	20,808		$	15,436

* Other liabilities include call option and short sale transactions

Net realized gains and losses from investments included losses of $527.7 million related to trading securities which were still held at December 31, 2008.

Net realized investment gains and losses included investment impairment write-downs of $22.7 million and $2.0 million in 2007 and 2006, respectively.  In addition, in 2007, net realized investment gains and losses also included $2.0 million gain and $1.4 million loss related to the change in the fair value of trading securities and hybrid financial instruments, respectively.

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

	Year ended December 31,
	2008			2007			2006
	(Amounts in thousands)
Fixed maturities available for sale:
Gross realized gains	$	-		$	1,626		$	541
Gross realized losses		-			(4,196	)		(3,778	)
Net	$	-		$	(2,570	)	$	(3,237	)
Fixed maturities trading:
Gross realized gains	$	5,436		$	-		$	-
Gross realized losses		(11,855	)		-			-
Net	$	(6,419	)	$	-		$	-
Equity securities available for sale:
Gross realized gains	$	-		$	69,288		$	30,990
Gross realized losses		-			(20,773	)		(10,955	)
Net	$	-		$	48,515		$	20,035
Equity securities trading:
Gross realized gains	$	26,795		$	7,145		$	-
Gross realized losses		(54,489	)		(5,431	)		-
Net	$	(27,694	)	$	1,714		$	-
Short-term investments	$	(804	)	$	(8,342	)	$	(2,832	)

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Unrealized Investment Gains and Losses in 2007 and 2006

Effective January 1, 2008, the Company adopted SFAS No. 159.  The gains and losses due to changes in fair value for items measured at fair value pursuant to election of the fair value option were included in net realized investment losses for 2008.  A summary of the net increase and decrease in unrealized investment gains and losses less applicable income tax expense or benefit for 2007 and 2006 is as follows:

	Year ended December 31,
	2007			2006
	(Amounts in thousands)
Net (decrease) increase in net unrealized investment gains and losses:
Fixed maturities available for sale	$	(18,612	)	$	(4,538	)
Income tax benefit		(6,514	)		(1,589	)
Total	$	(12,098	)	$	(2,949	)
Equity securities	$	35,382		$	9,311
Income tax expense		12,379			3,259
Total	$	23,003		$	6,052

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

	December 31, 2007
	(Amounts in thousands)
Fixed maturities available for sale:
Unrealized gains	$	54,975
Unrealized losses		(26,314	)
Tax effect		(10,031	)
Total	$	18,630
Equity securities available for sale:
Unrealized gains	$	104,717
Unrealized losses		(9,463	)
Tax effect		(33,326	)
Total	$	61,928

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Fair Value of Investments in 2008

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).  Accordingly, when market observable data is not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date.  Financial assets and financial liabilities recorded on the consolidated balance sheets at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:

Level 1   Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in active markets that the Company can access.

Level 2   Financial assets and financial liabilities whose values are based on the following:

a) Quoted prices for similar assets or liabilities in active markets;

b) Quoted prices for identical or similar assets or liabilities in non-active markets; or

c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3   Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

The availability of observable inputs varies by instrument.  In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption.  In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.  This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3.

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Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities

The Company primarily utilizes independent pricing services to obtain fair values on its portfolio except for 1% of its portfolio at fair value where unadjusted broker quotes are obtained and less than 1% for which management performed discounted cash flow modeling.

Level 1 Measurements

U.S. government bonds and agencies: U.S. treasuries and agencies are priced using unadjusted quoted market prices for identical assets in active markets.

Common stock; Other: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets.

Short-term investments: Comprised of actively traded short-term bonds and money market funds that have daily quoted net asset values for identical assets.

Derivative contracts: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on quoted prices for identical instruments in active markets.

Level 2 Measurements

Municipal securities: Municipal bonds are valued based on models or matrices using inputs including quoted prices for identical or similar assets in active markets.

Mortgage-backed securities: Valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets.

Corporate securities: Valued based on a multi-dimensional model using multiple observable inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets.

Redeemable and Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets.

Derivative contracts; Notes payable: Comprised of interest rate swaps that are valued based on models using inputs, such as interest rate yield curves, observable for substantially the full term of the contract.

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Level 3 Measurements

Municipal securities: Comprised of certain distressed municipal securities for which valuation is based on models that are widely accepted in the financial services industry and require projections of future cash flows that are not market observable.  Included in this category are $3.0 million of auction rate securities (“ARS”).  ARS are valued based on a discounted cash flow model with certain inputs that are significant to the valuation, but are not market observable.

The Company’s total financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment gains and losses in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2008
	(in thousands)
Assets
Fixed maturity securities:
U.S. government bonds and agencies	$	9,898	$	-	$	-	$	9,898
Municipal securities		-		2,184,684		2,984		2,187,668
Mortgage-backed securities		-		202,326		-		202,326
Corporate securities		-		65,727		-		65,727
Redeemable preferred stock		-		16,054		-		16,054
Equity securities:
Common stock:
Public utilities		39,148		-		-		39,148
Banks, trusts and insurance companies		11,328		-		-		11,328
Industrial and other		186,294		-		-		186,294
Non-redeemable preferred stock		-		10,621		-		10,621
Short-term investments		204,756		-		-		204,756
Derivative contracts		-		13,046		-		13,046
Total assets at fair value	$	451,424	$	2,492,458	$	2,984	$	2,946,866
Liabilities
Notes payable		-		139,276		-		139,276
Derivative contracts		2,803		-		-		2,803
Other		2,492		-		-		2,492
Total liabilities at fair value	$	5,295	$	139,276	$	-	$	144,571

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As required by SFAS No. 157, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety.  Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3).

The following table provides a summary of changes in fair value of Level 3 financial assets and financial liabilities held at fair value at December 31, 2008:

	Year ended
	December 31, 2008
	Fixed Maturities
	(in thousands)
Fair value at December 31, 2007	$	-
Transfers in and/or (out) of Level 3		4,705
Realized (losses) gains included in earnings		(1,721	)
Fair value at December 31, 2008	$	2,984
The amount of total losses for the period included in earnings
attributable to assets still held at December 31, 2008	$	(1,721	)

Losses included in earnings are reported in net realized investment gains and losses.

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Fair Value of Investments in 2007

The amortized cost and estimated fair value of investments in fixed maturities available-for-sale (excluding hybrid financial instruments with an estimated fair value of $31.8 million) as of December 31, 2007 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Amounts in thousands)
U.S. government bonds and agencies	$	36,157	$	283	$	65	$	36,375
Municipal securities		2,435,215		49,878		20,552		2,464,541
Mortgage-backed securities		227,606		2,018		2,049		227,575
Corporate securities		126,272		2,789		3,633		125,428
Redeemable preferred stock		2,079		7		15		2,071
Total	$	2,827,329	$	54,975	$	26,314	$	2,855,990

The Company monitors its investments closely.  Prior to the adoption of SFAS No. 159 on January 1, 2008, if an unrealized loss was determined to be other than temporary, it was written off as a realized loss through the consolidated statements of operations.  The Company’s assessment of other-than-temporary impairments was security-specific as of the balance sheet date and considered various factors including the length of time and the extent to which the fair value had been lower than the cost, the financial condition and the near-term prospects of the issuer, whether the debtor was current on its contractually obligated interest and principal payments, and the Company’s intent and ability to hold the securities until they mature or recover their value.  The Company recognized $22.7 million in realized losses as other-than-temporary declines to its investment securities during 2007.

The following table illustrates the gross unrealized losses on securities available for sale and the fair value of those securities, aggregated by investment category as of December 31, 2007.  The table also illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2007.

	Less than 12 months				12 months or more				Total
	Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value
	(Amounts in thousands)
U.S. government bonds and agencies	$	64	$	13,140	$	1	$	1,300	$	65	$	14,440
Municipal securities		12,342		788,701		8,210		294,940		20,552		1,083,641
Mortgage-backed securities		606		35,733		1,443		64,509		2,049		100,242
Corporate securities		2,177		18,141		1,456		48,444		3,633		66,585
Redeemable preferred stock		4		492		11		1,184		15		1,676
Subtotal, fixed maturity securities		15,193		856,207		11,121		410,377		26,314		1,266,584
Equity securities		8,882		81,215		581		4,060		9,463		85,275
Total temporarily impaired securities	$	24,075	$	937,422	$	11,702	$	414,437	$	35,777	$	1,351,859

As presented above, at December 31, 2007, the gross unrealized losses on securities available for sale were $35.8 million, which represented 1% of total investments at amortized cost.  These unrealized losses consisted mostly of individual securities with unrealized losses of less than 20% of each security’s amortized cost.  Of these, the most significant unrealized loss related to one corporate bond with an unrealized loss of approximately $1.3 million and with a market value decline of 13% of amortized cost.  Approximately $1.2 million of the total gross unrealized losses related to 26 individual equity securities and one fixed maturity security with unrealized losses that exceed 20% of each security’s amortized cost.  None of these 27 securities had unrealized losses greater than $0.1 million nor had they been in an unrealized loss position for more than 12 months.

91

Based upon the Company’s analysis of the securities, which included consideration of the status of debt servicing for fixed maturities and third party analyst estimates for the equity securities, and the Company’s intent and ability to hold the securities until they mature or recover their costs, the Company concluded that the gross unrealized losses of $35.8 million at December 31, 2007 were temporary in nature.

Unrealized losses that had been in a continuous unrealized loss position over 12 months were mostly accounted for by unrealized losses of fixed maturity securities, and amounted to 0.3% of the total investment market value at December 31, 2007.

Contractual Maturity

At December 31, 2008, bond holdings rated below investment grade or non rated were 3.6% of total investments at fair value.  Additionally, the Company owns securities that are credit enhanced by financial guarantors that are subject to uncertainty related to market perception of the guarantors’ ability to perform.  Determining the estimated fair value of municipal bonds could become more difficult should markets for these securities become illiquid.  The amortized cost and estimated fair value of fixed maturities at December 31, 2008 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.

	Amortized Cost		Estimated Fair Value
	(Amounts in thousands)
Fixed maturities:
Due in one year or less	$	27,298	$	24,813
Due after one year through five years		215,855		207,234
Due after five years  through ten years		554,761		522,501
Due after ten years		1,714,074		1,524,799
Mortgage-backed securities		216,483		202,326
Total	$	2,728,471	$	2,481,673

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(3)  Fixed Assets

A summary of fixed assets follows:

	December 31,
	2008			2007
	(Amounts in thousands)
Land	$	26,768		$	23,353
Buildings		114,185			94,827
Furniture and equipment		124,531			116,531
Capitalized software		84,021			74,307
Leasehold improvements		5,203			4,468
		354,708			313,486
Less accumulated depreciation		(162,931	)		(141,129	)
Net fixed assets	$	191,777		$	172,357

Depreciation expense including amortization of leasehold improvements was $27.0 million, $26.3 million, and $24.3 million during 2008, 2007 and 2006, respectively.

(4)  Deferred Policy Acquisition Costs

Policy acquisition costs incurred and amortized are as follows:

	Year ended December 31,
	2008			2007			2006
	(Amounts in thousands)
Balance, beginning of year	$	209,805		$	209,783		$	197,943
Costs deferred during the year		615,054			659,692			660,785
Amortization charged to expense		(624,854	)		(659,670	)		(648,945	)
Balance, end of year	$	200,005		$	209,805		$	209,783

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(5)  Notes Payable

Notes Payable consists of the following:

	2008		2007
	(Amounts in thousands)
Unsecured senior notes	$	158,625	$	134,062
Secured promissory note		-		4,500
Total	$	158,625	$	138,562

In February 2008, the Company acquired an 88,300 square foot office building in Folsom, California for approximately $18.4 million.  The Company financed the transaction through an $18 million bank loan.  On January 2, 2009, the loan was secured by municipal bonds pledged as collateral.  The loan matures on March 1, 2013 with interest payable quarterly at an annual floating rate of LIBOR plus 50 basis points.  On March 3, 2008, the Company entered into an interest rate swap of its floating LIBOR rate on the loan for a fixed rate of 3.75%, resulting in a total fixed rate of 4.25%, which expires on March 1, 2013.  The purpose of the swap is to offset the variability of cash flows resulting from the variable interest rate.  The swap is designated as a cash flow hedge.  The fair value of the interest rate swap was negative $1,348,000, pre-tax, at December 31, 2008 and has been recorded as a component of accumulated other comprehensive income and amortized into earnings over the life of the hedged transaction.  The interest rate swap was determined to be highly effective and no amount of ineffectiveness was recorded in earnings during 2008.

The Company’s acquisition of AIS was effective January 1, 2009 for $120 million.The acquisition was financed by a $120 million credit facility that is secured by municipal bonds pledged as collateral.  The credit facility calls for the minimum amount of collateral pledged multiplied by the bank's “advance rates” to be greater than the loan amount.  The collateral requirement is calculated as the fair market value of the municipal bonds pledged multiplied by the advance rates, which vary based on the credit quality and duration of the assets pledged and range between 75% and 100% of the fair value of each bond.  The loan matures on January 1, 2012 with interest payable at a floating rate of LIBOR rate plus 125 basis points.  On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on the loan for a fixed rate of 1.93%, resulting in a total fixed rate of 3.18%.  The purpose of the swap is to offset the variability of cash flows resulting from the variable interest rate.  The swap is not designated as a hedge.  Changes in the fair value are adjusted through the consolidated statement of operations in the period of change.

On August 7, 2001, the Company issued $125 million of senior notes payable.  The notes are unsecured, senior obligations of the Company with a 7.25% annual coupon rate payable on February 15 and August 15 each year.  The notes mature on August 15, 2011.  The Company incurred debt issuance costs of approximately $1.3 million, inclusive of underwriter’s fees.  These costs are deferred and then amortized as a component of interest expense over the term of the notes.  The notes were issued at a slight discount of 99.723%, resulting in the effective annualized interest rate including debt issuance costs of approximately 7.44%.

94

Effective January 2, 2002, the Company entered into an interest rate swap of its fixed rate obligation on the senior notes for a floating rate of LIBOR plus 107 basis points.  The swap agreement terminates on August 15, 2011 and includes an early termination option exercisable by either party on the fifth anniversary or each subsequent anniversary by providing sufficient notice, as defined.  The swap reduced interest expense in 2006, 2007 and 2008, but does expose the Company to higher interest expense in future periods if LIBOR rates increase.  The effective annualized interest rate was 3.3%, 6.4% and 6.6% in 2008, 2007 and 2006, respectively.  The swap is designated as a fair value hedge and qualifies for the “shortcut method” under SFAS No. 133, because the hedge is deemed to have no ineffectiveness.  The fair value of the interest rate swap was $14,393,000 and $9,218,000 at December 31, 2008 and 2007, respectively, and has been recorded in other assets in the consolidated balance sheets with a corresponding increase in notes payable.  The interest rate swap was determined to be highly effective and no amount of ineffectiveness was recorded in earnings during 2008, 2007 and 2006.

In October 2007, the Company completed the acquisition of a 4.25 acre parcel of land in Brea, California. In conjunction with the purchase, the Company entered into an 18-month lease agreement with the seller allowing the seller to use the property during the lease term.  Also, as part of the acquisition, the Company issued a secured promissory note in the amount of $4,500,000 without interest.  In December 2008, the note was paid in full and the lease agreement with the seller was terminated.  The Company has taken possession of the property at December 31, 2008.

The aggregated maturities for notes payable are as follows:

Year	Maturity
2009	$	-
2010	$	-
2011	$	125,000,000
2012	$	120,000,000
2013	$	18,000,000

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(6)  Income Taxes

Income tax provision

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

	Year ended December 31,
	2008			2007			2006
Federal	(Amounts in thousands)
Current	$	14,090		$	82,016		$	80,069
Deferred		(196,902	)		(7,844	)		(7,169	)
	$	(182,812	)	$	74,172		$	72,900
State
Current	$	(22,000	)	$	1,994		$	23,039
Deferred		(3,930	)		1,038			1,653
	$	(25,930	)	$	3,032		$	24,692
Total
Current	$	(7,910	)	$	84,010		$	103,108
Deferred		(200,832	)		(6,806	)		(5,516	)
Total	$	(208,742	)	$	77,204		$	97,592

The income tax provision reflected in the consolidated statements of operations is reconciled to the federal income tax on (loss) income before income taxes based on a statutory rate of 35% as shown in the table below:

	Year ended December 31,
	2008			2007			2006
	(Amounts in thousands)
Computed tax (benefit) expense at 35%	$	(157,801	)	$	110,263		$	109,343
Tax-exempt interest income		(38,902	)		(38,254	)		(33,325	)
Dividends received deduction		(1,966	)		(2,087	)		(1,902	)
Reduction of losses incurred deduction		6,106			6,014			5,245
State tax, penalty and interest (refund) assessment		(17,511	)		-			16,144
State tax expense		(830	)		1,989			2,679
Other, net		2,162			(721	)		(592	)
Income tax (benefit) expense	$	(208,742	)	$	77,204		$	97,592

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Deferred Tax Asset and Liability

The temporary differences that give rise to a significant portion of the deferred tax assets and liabilities relate to the following:

	December 31,
	2008			2007
	(Amounts in thousands)
Deferred tax assets
20% of net unearned premium	$	63,858		$	68,027
Discounting of loss reserves and salvage and subrogation recoverable
for tax purposes		16,711			15,941
Write-down of impaired investments		6,394			11,549
Tax benefit on net unrealized losses on securities carried at fair value		142,886			-
Tax credit carryforward		13,024			-
Expense accruals		16,096			15,276
Other deferred tax assets		9,360			3,787
Total gross deferred tax assets		268,329			114,580
Deferred tax liabilities
Deferred acquisition costs		(70,002	)		(73,432	)
Tax liability on net unrealized gain on securities carried at fair value		-			(43,357	)
Tax depreciation in excess of book depreciation		(14,228	)		(10,073	)
Accretion on bonds		-			(945	)
Undistributed earnings of insurance subsidiaries		(2,804	)		(5,113	)
Accounting method transition adjustments		(5,855	)		(8,278	)
Other deferred tax liabilities		(4,415	)		(4,234	)
Total gross deferred tax liabilities		(97,304	)		(145,432	)
Net deferred tax assets (liabilities)	$	171,025		$	(30,852	)

Realization of deferred tax assets is dependent on generating sufficient taxable income of an appropriate nature prior to their expiration.  The Company has the ability and intent, through the use of prudent tax planning strategies and the generation of capital gains to generate income sufficient to avoid losing the benefits of its deferred tax assets.  As a result, although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized.

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Uncertainty in Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. The tax years that remain subject to examination by major taxing jurisdictions are 2005 through 2007 for federal taxes and 2001 through 2007 for California state taxes.

On July 1, 2008, the California Superior Court ruled in favor of the Company in a case filed against the California FTB for tax years 1993 through 1996, entitling the Company to a tax refund of $24.5 million, including interest.  The time period for appeal of the decision has passed and the Company received the full amount on August 15, 2008.  After providing for federal taxes, the Company recognized a net tax benefit of $17.5 million in the third quarter 2008.

The FTB has audited the 1997 through 2002 and 2004 tax returns and accepted the 1997 through 2000 returns to be correct as filed. The Company received a notice of examination for the 2003 tax return from the FTB in January 2008. For the Company’s 2001, 2002, and 2004 tax returns, the FTB has taken exception to the state apportionment factors used by the Company.  Specifically, the FTB has asserted that payroll and property factors from MIS LLC, a subsidiary of MCC, that are excluded from the Mercury General California Franchise tax return, should be included in the California apportionment factors.  In addition, for the 2004 tax return, the FTB has asserted that a portion of management fee expenses paid by MIS LLC should be disallowed. Based on these assertions, the FTB has issued notices of proposed tax assessments for the 2001, 2002 and 2004 tax years totaling approximately $5 million. The Company strongly disagrees with the position taken by the FTB and plans to formally appeal the assessments before the California SBE. An unfavorable ruling against the Company may have a material impact on the Company’s results of operations in the period of such ruling. Management believes that the issue will ultimately be resolved in favor of the Company. However, there can be no assurance that the Company will prevail on this matter.

The Company adopted the provisions of FIN No. 48 on January 1, 2007.  No adjustment to the Company's financial position was required as a result of the implementation of this Interpretation.

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

	(Amounts in thousands)
Balance at January 1, 2008	$	4,418
Additions based on tax positions related to the current year		1,236
Additions for tax positions of prior years		347
Reductions for tax positions related to the current year		(24	)
Reductions as a result of as lapse of the applicable statue of limitations		(80	)
Balance at December 31, 2008	$	5,897

As presented above, the balance of unrecognized tax benefits at December 31, 2008 was $5,897,000.  Of this total, $4,914,000 represents unrecognized tax benefits, net of federal tax benefit and accrued interest expense which, if recognized, would affect the Company's effective tax rate.

Management anticipates that it is reasonably possible that the Company's total amount of unrecognized tax benefits will increase within the next twelve months by approximately $700,000 to $1,000,000 related to its ongoing California state tax apportionment factor issues.

The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income taxes.  During the years ended December 31, 2008, 2007, and 2006, the Company recognized net interest and penalty expense or (refunds) of $(16,672,000), $450,000, and $14,432,000, respectively.  The Company carried an accrued interest and penalty balance of $1,334,000 and $710,000 at December 31, 2008 and 2007, respectively.

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(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,
	2008			2007			2006
	(Amounts in thousands)
Gross reserves, beginning of year	$	1,103,915		$	1,088,822		$	1,022,603
Less reinsurance recoverable		(4,457	)		(6,429	)		(16,969	)
Net reserves, beginning of year		1,099,458			1,082,393			1,005,634
Incurred losses and loss adjustment expenses related to:
Current year		1,971,767			2,017,120			2,000,357
Prior years		88,642			19,524			21,289
Total incurred losses and adjustment expenses		2,060,409			2,036,644			2,021,646
Loss and loss adjustment expense payments related to:
Current year		1,316,242			1,345,234			1,311,982
Prior years		715,846			674,345			632,905
Total payments		2,032,088			2,019,579			1,944,887
Net reserves, end of year		1,127,779			1,099,458			1,082,393
Reinsurance recoverable		5,729			4,457			6,429
Gross reserves, end of year	$	1,133,508		$	1,103,915		$	1,088,822

The increase in the provision for insured events of prior years in 2008 of approximately $89 million resulted primarily from two sources.  The estimates for California Bodily Injury Severities and California Defense and Cost Containment reserves established at December 31, 2007 were too low and accounted for approximately $45 million of the adverse development. The New Jersey reserves established at December 31, 2007 were too low and accounted for approximately $30 million of the adverse development.  In California, the Company experienced a lengthening of the pay-out period for claims that are settled after the first year and a large increase in the average amounts paid on closed claims.  The Company believes that the lengthening of the pay-out periods may be attributable to a law passed in California several years ago that extended the statute for filing claims from one year to two years.  Initial indications, when the law was passed, were that this would have little impact on development patterns and therefore it was not fully factored into the reserve estimates.  In hindsight, claims payouts two to four years after the period-end have increased thereby affecting the loss reserve estimates at December 31, 2007.  The Company believes that it has factored this trend into its reserve estimate at December 31, 2008.  In New Jersey, due to a short operating history and rapid growth in that state, the Company had limited internal historical claims information to estimate BI, PIP and related loss adjustment expense reserves as of December 31, 2007.  Consequently, the Company relied substantially on industry data to help set these reserves.  During 2008, the reserve indications using the Company’s own historical data rather than industry data led to increases in its estimates for both PIP losses and loss adjustment expenses.  In particular, loss severities using Company data for the PIP coverage developed into larger amounts than the industry data suggested.  The Company is now using its own historical data, rather than industry data to set New Jersey loss reserves.  The Company believes that, over time, this will lead to less variation in reserve estimates.

99

The increase in the provision for insured events of prior years in 2007 primarily relates to adverse development of approximately $25 million in California mostly resulting from increases in estimates for loss severity and ultimate reported claims on the bodily injury reserves, which was partially offset by positive development of approximately $5 million related to operations outside of California.

The increase in the provision for insured events of prior years in 2006 relates largely to the unexpected development of several large extra-contractual claims in the state of Florida and increases in reserve estimates for the bodily injury and personal injury protection coverages in New Jersey.

In 2008 and 2007, the Company experienced pre-tax catastrophe losses of $26 million and $23 million, respectively.  The pre-tax losses in 2008 were $20 million related to Southern California wildfires and $6 million related to Hurricane Ike in Texas.  The full $23 million of catastrophe losses in 2007 related to Southern California wildfires.

(8)  Shareholder Dividends and Dividend Restrictions

The following table summarizes shareholder dividends paid in total and per-share:

	2008		2007		2006
Total paid	$	127,011,000	$	113,802,000	$	104,960,000
Per-share	$	2.32	$	2.08	$	1.92

The Insurance Companies are subject to the financial capacity guidelines established by their domiciliary states.  The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations.  For 2009, the direct insurance subsidiaries of the Company are permitted to pay approximately $136.7 million in dividends to the Company without the prior approval of the DOI of the states of domicile.  The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay shareholder dividends.  During 2008 and 2007, the Insurance Companies paid ordinary dividends to the Company of $140.0 million and $127.0 million, respectively.

(9)  Supplemental Cash Flow Information

A summary of interest, income taxes paid and net realized gains and losses from sale of investments is as follows:

	Year Ended December 31,
	2008			2007		2006
	(Amounts in thousands)
Interest	$	5,787		$	8,618	$	8,702
Income taxes		39,087			100,410		73,144
Net realized (losses) gains from sale of investments		(18,698	)		42,553		18,549

In 2007, the Company issued a promissory note of $4.5 million in connection with the acquisition of a 4.25 acre parcel of land in Brea, California.  The note was paid in full in December 2008.

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(10)Statutory Balances and Accounting Practices

The Insurance Companies prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the various state insurance departments.  Prescribed statutory accounting practices primarily include those published as statements of Statutory Accounting Principles by 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, 2008, there were no material permitted statutory accounting practices utilized by the Insurance Companies.

The following table summarizes the statutory net loss or income and statutory policyholders’ surplus of the Insurance Companies, as reported to regulatory authorities:

	Year Ended December 31,
	2008		2007		2006
	(Amounts in thousands)
Statutory net income	$	86,514	$	237,283	$	238,138
Statutory surplus		1,371,095		1,721,827		1,579,249

Statutory net income excluded changes in the fair value of the investment portfolio.  As a result of the adoption of SFAS No. 159 on January 1, 2008 for GAAP purposes, the change in unrealized gains and losses on all investments is recorded as realized gains and losses on the consolidated statements of operations.  During 2008, the Company recognized approximately $525.7 million of losses related to the change in fair value of the total investment portfolio as a result of the adoption of SFAS No. 159.

The statutory surplus of each of the Insurance Companies exceeded the highest level of minimum required capital.

(11)  Profit Sharing Plan

The Company, at the option of the Board of Directors, may make annual contributions to an employee Profit Sharing Plan (the “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.  No contributions were made by the Company during 2008 compared to $1,900,000 for each of 2007 and 2006.

The Plan 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 $6,802,000, $5,056,000 and $4,512,000 for 2008, 2007 and 2006, respectively.

The Plan also includes an employee stock ownership plan (“ESOP”) that covers substantially all employees.  The Board of Directors authorized the Plan to purchase $1.2 million of the Company’s common stock in the open market for allocation to the Plan participants in 2007 and 2006.  Accordingly, the Company recognized $1.2 million compensation expense in those years.  The Board of Directors did not authorize the purchase of common stock for the Plan for 2008.

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(12)  Share-Based Compensation

In May 1995, the Company adopted the 1995 Equity Participation Plan (the “1995 Plan”) which succeeded a prior plan. In May 2005, the Company adopted the 2005 Equity Incentive Award Plan (the “2005 Plan”) which succeeded the 1995 Plan. Share-based compensation awards may only be granted under the 2005 Plan. A combined total of 5,400,000 shares of Common Stock under the 1995 Plan and the 2005 Plan are authorized for issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards.  The maximum number of shares that may be issued under the 2005 Plan is 5,400,000. As of December 31, 2008, only options and restricted stock awards have been granted under these plans.  Beginning January 1, 2008, options granted for which the Company has recognized share-based compensation expense generally become exercisable 25% per year beginning one year from the date granted, are granted at the market price on the date of grant, and expire after 10 years.  Prior to January 1, 2008, shares became exercisable at a rate of 20% per year.  The Company has no restricted stock outstanding as of December 31, 2008.

Cash received from option exercises was $1,286,000, $2,173,000 and $1,943,000 during 2008, 2007 and 2006, respectively.  The excess tax benefit realized for the tax deduction from option exercises of the share-based payment awards totaled $121,000, $273,000 and $505,000 during 2008, 2007 and 2006, respectively.

The fair value of stock option awards was estimated using the Black-Scholes option pricing model with the following grant-date assumptions and weighted-average fair values:

	Year Ended December 31,
	2008			2007			2006
Weighted-average fair  value of grants	$	4.84		$	7.45		$	10.62
Expected volatility		17.87%-19.38	%		17.87%-18.50	%		20.56%-24.22	%
Weighted-average expected volatility		18.65	%		18.14	%		20.56	%
Risk-free interest rate		2.93%-3.29	%		4.02%-4.91	%		4.54%-5.00	%
Expected dividend yield		4.54%-4.85	%		3.77%-4.13	%		3.41%-3.74	%
Expected term in months		72			72			72

The risk free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the time of the grant.  The expected volatility on the date of grant is calculated based on historical volatility over the expected term of the options.  The expected term computation is based on historical exercise patterns and post-vesting termination behavior.

A summary of the stock option activity of the Company’s plans in 2008 is presented below:

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in 000's)
Outstanding at January 1, 2008		477,245		$	46.70
Granted		88,000			48.20
Exercised		(33,800	)		38.05
Cancelled or expired		-			-
Outstanding at December 31, 2008		531,445		$	47.49		6.1	$	1,384
Exercisable at December 31, 2008		276,345		$	43.64		4.1	$	1,384

102

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all options been exercised on December 31, 2008.  The aggregate intrinsic value of stock options exercised was $442,000, $1,134,000 and $1,661,000 during 2008, 2007 and 2006, respectively.  The total fair value of options vested was $652,000, $487,000 and $886,000 during 2008, 2007 and 2006, respectively.

The following table summarizes information regarding stock options outstanding at December 31, 2008:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Avg. Remaining Contractual Life		Weighted Avg. Exercise Price		Number Exercisable		Weighted Avg. Exercise Price
$	22.06 to 29.77		18,245		1.1	$	24.00		18,245	$	24.00
$	33.88 to 58.83		513,200		6.2	$	48.33		258,100	$	45.03

As of December 31, 2008, $1,457,000 of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of 1.9 years.

(13)  Earnings Per Share

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

	2008								2007						2006
	(Amounts in thousands, except per share data)
	Loss (Numerator)			Weighted Shares (Denominator)		Per-Share Amount			Income (Numerator)		Weighted Shares (Denominator)		Per-Share Amount		Income (Numerator)		Weighted Shares (Denominator)		Per-Share Amount
Basic EPS
Income (Loss) available to
common stockholders	$	(242,119	)		54,744	$	(4.42	)	$	237,832		54,704	$	4.35	$	214,817		54,651	$	3.93
Effect of dilutive securities:
Options		-			173					-		125				-		135
Diluted EPS
Income (Loss) available to
common stockholders after
assumed conversions	$	(242,119	)		54,917	$	(4.42	)	$	237,832		54,829	$	4.34	$	214,817		54,786	$	3.92

The antidilutive impact of incremental shares is excluded from loss positions in 2008 in accordance with GAAP.

The diluted weighted shares exclude incremental shares of 305,000, 88,000 and 107,000 for 2008, 2007 and 2006, respectively.  These shares are excluded due to their antidilutive effect.

103

(14)  Commitments and Contingencies

Leases

The Company is obligated under various non-cancellable lease agreements providing for office space and equipment rental that expire at various dates through the year 2014.  For leases that contain predetermined escalations of the minimum rentals, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred rent in other liabilities.  This liability amounted to approximately $1,426,000 and $1,153,000 at December 31, 2008 and 2007, respectively.  Total rent expense under these lease agreements was $12,002,000, $9,469,000 and $8,292,000 for 2008, 2007 and 2006, respectively.

The annual rental commitments are as follows:

	As of December 31, 2008
	(Amounts in thousands)
2009	$	10,172
2010		9,563
2011		7,550
2012		6,241
2013		2,988
Thereafter		179

California Earthquake Authority

The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowners policies through the CEA.  The Company receives a small fee for placing business with the CEA, which was recorded as other income in the consolidated statements of operations.

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 26, 2008, was approximately $74 million.

104

Litigation

The Company is, from time to time, named as a defendant in various lawsuits relating to its insurance business. In most of these actions, plaintiffs assert claims for punitive damages, which are not insurable under judicial decisions. The Company has established reserves for lawsuits in cases where the Company is able to estimate its potential exposure and it is probable that the court will rule against the Company.  The Company vigorously defends actions against it, unless a reasonable settlement appears appropriate.  An unfavorable ruling against the Company in the actions currently pending may have a material impact on the Company’s results of operations in the period of such ruling, however, it is not expected to be material to the Company’s financial condition.

In Marissa Goodman, on her own behalf and on behalf of all others similarly situated v. Mercury Insurance Company (Los Angeles Superior Court), filed June 16, 2002, the Plaintiff is challenging the Company’s use of certain automated database vendors to assist in valuing claims for medical payments alleging that they systematically undervalue medical payment claims to the detriment of insured. The Plaintiff is seeking actual and punitive damages. Similar lawsuits have been filed against other insurance carriers in the industry. The case has been coordinated with two other similar cases, and also with ten other cases relating to total loss claims.  The Plaintiff sought class action certification of all of the Company’s insureds from 1998 to the present who presented a medical payments claim, had the claim reduced using the computer program and whose claim did not reach the policy limits for medical payments. The Court certified the class on January 11, 2007. The Company appealed the class certification ruling, and the Court of Appeal stayed the case pending their review. The Company and the Plaintiff subsequently agreed to settle the claims for an amount that is immaterial to the Company’s operations and financial position. The settlement was approved by the Court on April 24, 2008, and on January 30, 2009, the Court approved the final distribution of the settlement proceeds.

The Company is also involved in proceedings relating to assessments and rulings made by the California Franchise Tax Board.  See Note 6 of Notes to Consolidated Financial Statements.

(15)  Risks and Uncertainties

The economies of California, the United States and the world are experiencing a deepening recession.  There has been a rise in the unemployment rate and significant disruption in the capital markets.  While some economists have predicted an end to this recession by sometime in the second half of 2009, the actual length and depth of the recession and the disruption in the capital markets is currently unknown.

The Company is affected by the recession, particularly in how it impacts the state of California.  The deepening recession with rising unemployment has contributed to declining premium revenues and could lead to further premium revenue declines in the future.  The disruption in the capital markets has led to reductions in the fair value of the Company’s investments which led to significant capital losses in 2008.  Should the capital markets continue to be strained, it is likely that further capital losses will be realized.

The Company is taking steps to align expenses with declining revenues, however, not all expenses can be effectively reduced and continued declines in premium volumes could lead to higher expense ratios.

The Company has recorded a deferred tax asset as a result of the fair value declines in the investment portfolio.  Should the value of the portfolio continue to decline, additional deferred tax assets would be recorded and it is possible that a valuation allowance would be required if the realization of the deferred tax assets becomes unlikely.

The impact on the Company from the recession would also affect the net income and surplus of the Insurance Companies which could impact the ability and capacity of the Company to pay shareholder dividends.

105

(16)  Subsequent Event

On October 10, 2008, MCC, the primary insurance subsidiary of the Company, entered into the Purchase Agreement with Aon Corporation and Aon Services Group, Inc.  Pursuant to the terms of the Purchase Agreement, effective January 1, 2009, MCC acquired all of the membership interests of AIS Management LLC, which is the parent company of AIS and PoliSeek AIS Insurance Solutions, Inc.  AIS is a major producer of automobile insurance in the state of California and the Company’s largest independent broker producing over $400 million of direct premiums written, which represented approximately 15% and 14% of the Company’s direct premiums written during 2008 and 2007, respectively.  This preexisting relationship did not require measurement at the date of acquisition as there was no settlement of executory contracts between the Company and AIS as part of the acquisition.

The preliminary estimate of goodwill of $36.4 million arising from the acquisition consists largely of the efficiency and economies of scale expected from combining the operations of the Company and AIS.  Goodwill in the amount of $37.3 million is expected to be deductible for income tax purposes and exceeds recorded goodwill due to the capitalization of transaction costs for tax purposes.

The total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based upon preliminary estimates of their fair values at the acquisition date.  The following table summarizes the consideration paid for AIS and the preliminary allocation of the purchase price.

	January 1, 2009
	(Amounts in thousands)
Consideration
Cash	$	120,000
Fair value of total consideration transferred	$	120,000
Acquisition-related costs	$	2,000
Recognized amounts of identifiable assets acquired
and liabilities assumed
Financial assets	$	12,028
Net property, plant, and equipment		4,115
Favorable leases		1,725
Trade names		15,400
Customer relationships		51,200
Software & technology		4,850
Net deferred tax asset		156
Liabilities assumed		(5,825	)
Total identifiable net assets		83,649
Goodwill		36,351
Total	$	120,000

106

The expected weighted-average amortization periods for intangible assets with definite lives, by asset class, are: 24 years for trade names, 11 years for customer relationships, 10 years for technology, 2 years for software and 3 years for lease agreements.

A contingent consideration arrangement requires the Company to pay the former owner of AIS up to an undiscounted maximum amount of $34.7 million.  The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangement is between $0 and $34.7 million.  Based on the projected performance of the AIS business over the next two years, the Company does not expect to pay the contingent consideration.  That estimate is based on significant inputs that are not observable in the market, including management’s projections of future cash flows, to which SFAS No. 157 refers as Level 3 inputs.  Key assumptions in determining the estimated contingent consideration include (a) a discount rate of 10.7% and (b) a decline in revenues ranging from -4% to - -5%.  As of February 27, 2009, the estimates for the contingent consideration arrangement, the range of outcomes, and the assumptions used to develop the estimates had not changed.

The fair value of the financial assets acquired includes cash, receivables from customers and other assets.  The fair value of the liabilities assumed includes accounts payable and other accrued liabilities.

The final purchase price and the valuation of the financial assets acquired and financial liabilities assumed are expected to be completed as soon as practicable, but no later than one year from the date of acquisition.  The final purchase price allocation is still under review, specifically related to the determination of the fair value of current assets, current liabilities, fixed assets, identifiable intangible assets and deferred tax balances.  The Company believes that any adjustments would not be material to the consolidated financial statements and management expects this review to be completed by April 30, 2009.

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

None

107

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.  In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.  Based upon its assessment, the Company’s management believes that, as of December 31, 2008, the Company’s internal control over financial reporting is effective based on these criteria.

The Company’s independent auditors have issued an audit report on the effectiveness of the Company’s internal control over financial reporting.  This report appears on page 69.

Item 9B. Other Information

None

108

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 and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions

Item 14. Principal Accounting Fees and Services

Information regarding executive officers of the Company is included in Part I.  For information called for by Items 10, 11, 12, 13 and 14 reference is made to the Company’s definitive proxy statement for its Annual Meeting of Shareholders, to be held on May 13, 2009, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2008 and which is incorporated herein by reference.

109

PART IV

Item 15. Exhibits, Financial Statement Schedules

(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, 2008 are contained herein as listed in the Index to Consolidated Financial Statements on page 67.

2.    Financial Statement Schedules:

Title

Report of Independent Registered Public Accounting Firm

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.

3.    Exhibits

3.1	(1)	Articles of Incorporation of the Company, as amended to date.
3.2	(2)	Amended and Restated Bylaws of the Company.
3.3	(3)	First Amendment to Amended and Restated Bylaws of the Company.
3.4	(4)	Second Amendment to Amended and Restated Bylaws of the Company.
4.1	(5)	Shareholders’ Agreement dated as of October 7, 1985 among the Company, George Joseph and Gloria Joseph.
4.2	(6)	Indenture between the Company and Bank One Trust Company, N.A., as Trustee dated as of June 1, 2001.
4.3	(7)	Officers’ Certificate establishing the Company’s 7.25% Senior Notes due 2011 as a series of securities under the Indenture dated as of June 1, 2001 between Mercury General Corporation and Bank One Trust Company, N.A.
10.1	(1)	Form of Agency Contract.
10.2	(8)*	Profit Sharing Plan, as Amended and Restated as of March 11, 1994.
10.3	(9)*	Amendment 1994-I to the Mercury General Corporation Profit Sharing Plan.
10.4	(9)*	Amendment 1994-II to the Mercury General Corporation Profit Sharing Plan.
10.5	(10)*	Amendment 1996-I to the Mercury General Corporation Profit Sharing Plan.
10.6	(10)*	Amendment 1997-I to the Mercury General Corporation Profit Sharing Plan.
10.7	(1)*	Amendment 1998-I to the Mercury General Corporation Profit Sharing Plan.
10.8	(11)*	Amendment 1999-I and Amendment 1999-II to the Mercury General Corporation Profit Sharing Plan.
10.9	(12)*	Amendment 2001-I to the Mercury General Corporation Profit Sharing Plan.
10.10	(13)*	Amendment 2002-1 to the Mercury General Corporation Profit Sharing Plan.
10.11	(13)*	Amendment 2002-2 to the Mercury General Corporation Profit Sharing Plan.
10.12	(14)*	Amendment 2003-1 to the Mercury General Corporation Profit Sharing Plan.
10.13	(14)*	Amendment 2004-1 to the Mercury General Corporation Profit Sharing Plan.
10.14	(15)*	Amendment 2006-1 to the Mercury General Corporation Profit Sharing Plan.
10.15	(16)*	Amendment 2006-2 to the Mercury General Corporation Profit Sharing Plan.
10.16	(15)*	Amendment 2007-1 to the Mercury General Corporation Profit Sharing Plan.
10.17	*	Amendment 2008-1 to the Mercury General Corporation Profit Sharing Plan.
10.18	*	Amendment 2008-2 to the Mercury General Corporation Profit Sharing Plan.
10.19	(17)*	The 1995 Equity Participation Plan.
10.20	(18)	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.
10.21	(18)	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and American Mercury Insurance Company.
10.22	(18)	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Insurance Company of Georgia.
10.23	(18)	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Indemnity Company of Georgia.
10.24	(18)	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Insurance Company of Illinois.
10.25	(18)	Management Agreement effective January 1, 2001 between Mercury Insurance Services, LLC and Mercury Indemnity Company of Illinois.
10.26	(12)	Management Agreement effective January 1, 2002 between Mercury Insurance Services, LLC and Mercury Insurance Company of Florida and Mercury Indemnity Company of Florida.
10.27	(16)	Management Agreement dated January 22, 1997 between Mercury County Mutual Insurance Company (formerly known as Elm County Mutual Insurance Company and Vesta County Mutual Insurance Company) and Mercury Insurance Services, LLC (as successor in interest).
10.28	*	Director Compensation Arrangements.
10.29	(19)*	Mercury General Corporation Senior Executive Incentive Bonus Plan.
10.30	(20)*	Mercury General Corporation 2005 Equity Incentive Award Plan.
10.31	(21)*	Incentive Stock Option Agreement under the Mercury General Corporation 2005 Equity Incentive Award Plan.
10.32	(22)*	Restricted Stock Agreement under the Mercury General Corporation 2005 Equity Incentive Award Plan.
10.33	(23)	Stock Purchase Agreement, dated as of October 10, 2008, by and among Aon Corporation, a Delaware corporation, Aon Services Group, Inc., a Delaware corporation, and Mercury Casualty Company, a California corporation.
10.34		Credit Agreement, dated as of January 2, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto
10.35		Amendment Agreement to Credit Agreement, dated as of January 26, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto.
21.1		Subsidiaries of the Company.
23.1		Consent of Independent Registered Public Accounting Firm.
31.1		Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
32.2		Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Annual Report on Form 10-K and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.

(1)  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.

(2)  This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended September 30, 2007, and is incorporated herein by this reference.

(3)  This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 4, 2008, and is incorporated herein by this reference.

(4)  This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on February 25, 2009, and is incorporated herein by this reference.

(5)  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.

(6)  This document was filed as an exhibit to Registrant’s Form S-3 filed with the Securities and Exchange Commission on June 4, 2001, and is incorporated herein by this reference.

(7)  This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 6, 2001, and is incorporated herein by this reference.

(8)  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.

(9)  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.

(10)  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.

(11)  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.

(12)This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2001, and is incorporated herein by this reference.

(13)This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2002, and is incorporated herein by this reference.

(14)This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2004, and is incorporated herein by this reference.

(15)This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2007, and is incorporated herein by this reference.

(16)This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2006, and is incorporated herein by this reference.

(17)This document was filed as an exhibit to Registrant’s Form S-8 filed with the Securities and Exchange Commission on March 8, 1996, and is incorporated herein by this reference.

(18)This document was filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by this reference.

(19)This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 19, 2008, and is incorporated herein by this reference.

(20)This document was filed as an exhibit to the Company’s Definitive Proxy Statement on Schedule 14A (File No. 001-12257) filed with the Securities and Exchange Commission on April 5, 2005.

(21)This document was filed as an exhibit to Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 16, 2005, and is incorporated herein by this reference.

(22)This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended March 31, 2006, and is incorporated herein by this reference.

(23)This document was filed as an exhibit to Registrant’s Form 10-Q for the quarterly period ended September 30, 2008, and is incorporated herein by this reference.

*Denotes management contract or compensatory plan or arrangement.

110

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/ GABE TIRADOR
	Gabriel Tirador
	President and Chief Executive Officer

February 27, 2009

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
/s/ GEORGE JOSEPH		Chairman of the Board		February 27, 2009
George Joseph
/s/ GABRIEL TIRADOR		President and Chief Executive Officer		February 27, 2009
Gabriel Tirador			and Director (Principal Executive Officer)
/s/ THEODORE STALICK		Vice President and Chief Financial		February 27, 2009
Theodore Stalick			Officer (Principal Financial Officer
			and Principal Accounting Officer)
/s/ NATHAN BESSIN		Director		February 27, 2009
Nathan Bessin
/s/ BRUCE A. BUNNER		Director		February 27, 2009
Bruce A. Bunner
/s/ MICHAEL D. CURTIUS		Director		February 27, 2009
Michael D. Curtius
/s/ RICHARD E. GRAYSON		Director		February 27, 2009
Richard E. Grayson
/s/ MARTHA MARCON		Director		February 27, 2009
Martha Marcon
/s/ DONALD P. NEWELL		Director		February 27, 2009
Donald P. Newell
		Director		February 27, 2009
Donald R. Spuehler

111

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Mercury General Corporation:

Under date of February 27, 2009, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008, as contained in the annual report on Form 10-K for the year 2008.  In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed under Item 15(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, such 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.

As discussed in Note 1 to the consolidated financial statements, the Company has adopted the provisions of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, as of January 1, 2008.

/s/ KPMG LLP

Los Angeles, California

February 27, 2009

112

SCHEDULE I

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

SUMMARY OF INVESTMENTS

OTHER THAN INVESTMENTS IN RELATED PARTIES

December 31, 2008

Type of Investment	Cost		Fair Value		Amount at which shown in the balance sheet
	(Amounts in thousands)
Fixed maturity securities:
Bonds:
U.S. government bonds and agencies	$	9,633	$	9,898	$	9,898
Municipal securities		2,370,880		2,187,668		2,187,668
Mortgage-backed securities		216,482		202,326		202,326
Corporate securities		77,097		65,727		65,727
Redeemable preferred stock		54,379		16,054		16,054
Total fixed maturity securities		2,728,471		2,481,673		2,481,673
Equity securities:
Common stock:
Public utilities		32,293		39,148		39,148
Banks, trust and insurance companies		20,451		11,328		11,328
Industrial, miscellaneous and all other companies		330,030		186,294		186,294
Non-redeemable preferred stock		20,999		10,621		10,621
Total equity securities		403,773		247,391		247,391
Short-term investments		208,278		204,756		204,756
Total investments	$	3,340,522	$	2,933,820	$	2,933,820

113

SCHEDULE I, Continued

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

SUMMARY OF INVESTMENTS

OTHER THAN INVESTMENTS IN RELATED PARTIES

December 31, 2007

Type of Investment	Cost		Fair Value		Amount at which shown in the balance sheet
	(Amounts in thousands)
Fixed maturity securities:
Bonds:
U.S. government bonds and agencies	$	36,157	$	36,375	$	36,375
Municipal securities		2,435,216		2,464,542		2,464,542
Mortgage-backed securities		245,731		246,072		246,072
Corporate securities		141,272		138,700		138,700
Redeemable preferred stock		2,079		2,071		2,071
Total fixed maturity securities		2,860,455		2,887,760		2,887,760
Equity securities:
Common stock:
Public utilities		35,703		66,175		66,175
Banks, trust and insurance companies		20,284		21,371		21,371
Industrial, miscellaneous and all other companies		245,095		313,035		313,035
Non-redeemable preferred stock		29,913		27,656		27,656
Total equity securities		330,995		428,237		428,237
Short-term investments		272,678				272,678
Total investments	$	3,464,128			$	3,588,675

114

SCHEDULE II

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

December 31,

	2008			2007
	(Amounts in thousands)
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost $961)	$	-		$	987
Fixed maturities trading, at fair value (amortized cost $576)		590			-
Equity securities available for sale, at fair value (cost $17,716)		-			20,121
Equity securities trading, at fair value (cost $20,965; $6,282)		12,331			7,233
Short-term investments, at fair value in 2008; at cost in 2007 (cost $55,641 in 2008)		52,104			37,776
Investment in subsidiaries		1,533,147			1,915,871
Total investments		1,598,172			1,981,988
Cash		2,389			3,072
Amounts receivable from affiliates		527			514
Income taxes		21,685			8,895
Other assets		17,886			11,074
Total assets	$	1,640,659		$	2,005,543
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable		139,276			134,062
Accounts payable and accrued expenses		1,920			3,732
Other liabilities		5,412			5,751
Total liabilities		146,608			143,545
Shareholders' equity:
Common stock		71,428			69,369
Accumulated other comprehensive income		(876	)		80,557
Retained earnings		1,423,499			1,712,072
Total shareholders' equity		1,494,051			1,861,998
Total liabilities and shareholders' equity	$	1,640,659		$	2,005,543

See accompanying notes to condensed financial information.

115

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF INCOME

Three years ended December 31,

	2008			2007			2006
	(Amounts in thousands)
Revenues:
Net investment income	$	1,767		$	2,813		$	1,860
Net realized investment losses		(22,417	)		(3,147	)		(1,336	)
Total Revenues		(20,650	)		(334	)		524
Expenses:
Other operating expenses		4,007			4,209			3,586
Interest		4,314			8,171			8,423
Total expenses		8,321			12,380			12,009
Loss before income taxes and equity in net (loss) income of subsidiaries		(28,971	)		(12,714	)		(11,485	)
Income tax (benefit) expense		(28,698	)		(2,356	)		10,536
Loss before equity in net income of subsidiaries		(273	)		(10,358	)		(22,021	)
Equity in net (loss) income of subsidiaries		(241,846	)		248,190			236,838
Net (loss) income	$	(242,119	)	$	237,832		$	214,817

See accompanying notes to condensed financial information.

116

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS

Three years ended December 31,

	2008			2007			2006
	(Amounts in thousands)
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	4,582		$	(9,627	)	$	(10,733	)
Cash flows from investing activities
Capital contribution to controlled entities		-			(11,250	)		(20,000	)
Dividends from subsidiaries		140,000			127,000			168,000
Fixed maturities available for sale in nature:
Purchases		-			-			(9	)
Sales		-			-			333
Calls or maturities		397			353			-
Equity securities available for sale in nature:
Purchases		(24,473	)		(52,121	)		(73,310	)
Sales		19,129			47,764			72,469
Decrease in payable for securities, net		(602	)		(204	)		(254	)
Net (increase) decrease in short-term investments		(14,279	)		7,231			(31,901	)
Other, net		167			(207	)		18
Net cash provided by  investing activities		120,339			118,566			115,346
Cash flows from financing activities:
Dividends paid to shareholders		(127,011	)		(113,802	)		(104,960	)
Stock options exercised		1,286			2,173			1,943
Excess tax benefit  from exercise of stock options		121			273			505
Net cash used in financing activities		(125,604	)		(111,356	)		(102,512	)
Net (decrease) increase in cash		(683	)		(2,417	)		2,101
Cash:
Beginning of the year		3,072			5,489			3,388
End of the year	$	2,389		$	3,072		$	5,489

See accompanying notes to condensed financial information.

117

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO CONDENSED FINANCIAL INFORMATION

December 31, 2008 and 2007

The accompanying condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.

Reclassifications

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

Dividends Received From Subsidiaries

Dividends of $140,000,000, $127,000,000 and $168,000,000 were received by the Company from its wholly-owned subsidiaries in 2008, 2007 and 2006, respectively, and are recorded as a reduction to investment in subsidiaries.

Capitalization of Subsidiaries

No capital contributions were made by the Company to its insurance subsidiaries during 2008 compared to $11,250,000 in 2007.

Guarantees

The borrowings by MCC under the $120 million secured credit facility and $18 million secured loan are secured by MCC’s assets including approximately $177.3 million of bonds, at fair value, held as collateral.  Additionally, the total borrowings of $138 million are guaranteed by the Company.

Federal Income Taxes

The Company files a consolidated federal tax return with the following entities:

Mercury Casualty Company

Mercury Insurance Company

California General Underwriters Insurance Company, Inc.

California Automobile Insurance Company

Mercury Insurance Company of Illinois

Mercury National Insurance Company

Mercury Insurance Company of Georgia

Mercury Indemnity Company of Georgia

American Mercury Insurance Company

Mercury Select Management Company, Inc.

American Mercury Lloyds Insurance Company

American Mercury MGA, Inc.

Concord Insurance Services, Inc.

Mercury County Mutual Insurance Company

Mercury Insurance Company of Florida

Mercury Indemnity Company of America

Mercury Group, Inc.

The method of allocation between the companies is subject to agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses incurred by the insurance subsidiaries to the extent it can be used in the current consolidated return.

118

SCHEDULE IV

MERCURY GENERAL CORPORATION

REINSURANCE

Three years ended December 31,

Property and Liability insurance earned premiums

	Direct Amount		Ceded to Other Companies		Assumed		Net Amount
	(Amounts in thousands)
2008	$	2,810,370	$	3,801	$	2,270	$	2,808,839
2007	$	2,996,927	$	4,119	$	1,069	$	2,993,877
2006	$	3,007,007	$	11,092	$	1,108	$	2,997,023

119

EX-10.17

AMENDMENT 2008-1

MERCURY GENERAL CORPORATION

PROFIT SHARING PLAN

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

WHEREAS, pursuant to Section 9.1 of the Plan, the Company is authorized to amend the Plan; and

WHEREAS, the Company desires to amend the Plan to reflect certain changes in the newly adopted automatic enrollment procedures put into effect as of January 1, 2008; and

WHEREAS, the Company desires to amend the Plan to reflect certain changes in eligibility provisions in Section 2.1(b) with respect to automatic enrollment in the Plan.

NOW, THEREFORE, the Plan is amended, effective as of the dates specified below, as follows.

1.The Section 2.1(b) of the Plan is hereby amended by adding the following new paragraph at the end thereof, effective September 1, 2008, to read as follows:

“Notwithstanding the foregoing, effective September 1, 2008, each Employee who becomes an Eligible Employee on or after September 1, 2008 shall become eligible to make Compensation Deferrals to the Plan in accordance with Section 3.2 (and to receive allocations of Employer Matching Contributions on such Compensation Deferrals in accordance with Section 3.3) as of the first day of the month next following the latest of (1) the completion of 60 days of employment as an Employee of the Company, (2) his attainment of age 18, or (3) the date on which he becomes an Eligible Employee.”

IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute this amendment to the Plan this 29th day of August, 2008.

MERCURY GENERAL CORPORATION

By:   /s/ GABRIEL TIRADOR

Its:   President

EX-10.18

AMENDMENT 2008-2

MERCURY GENERAL CORPORATION

PROFIT SHARING PLAN

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

WHEREAS, pursuant to Section 9.1 of the Plan, the Company is authorized to amend the Plan; and

WHEREAS, the Company desires to amend the Plan to reflect certain changes in the federal tax laws and related Treasury Regulations; and

WHEREAS, the Company desires to amend the Plan to amend the Plan to provide for the acceptance, at the Company’s discretion, of in-kind rollovers of participant loan balances in connection with a merger, acquisition or similar corporate transaction.

NOW, THEREFORE, the Plan is amended, effective as of the dates specified below, as follows.

1.The definition of “Compensation” in Section 1.2 of the Plan is hereby amended by adding the following to the end of the first full paragraph thereof:

“, and all compensation paid or includible following a Break in Employment.”

2.The last sentence of Section 3.4(a) of the Plan is amended to read in its entirety as follows:

“Amounts transferred to the Trust must be in cash, except that individuals who become Eligible Employees as a result of a merger, acquisition or similar transaction may, if permitted by the Company, make in-kind rollovers of participant loans that are distributed to such Eligible Employees in connection with such merger, acquisition or transaction.”

3.The definition of “Section 415 Compensation” in Section A.1 of Appendix A of the Plan is hereby amended by adding the following to the end of the first sentence immediately following subsection “(d)” to read in its entirety as follows”

“, and excluding all compensation paid or includible following a Break in Employment, except as provided under applicable Treasury Regulations.”

4.Section A.2(d) of Appendix A of the Plan is deleted.

IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute this amendment to the Plan this 7th day of November, 2008.

MERCURY GENERAL CORPORATION

By:   /s/ GABRIEL TIRADOR

Its:    President and CEO

EX-10.28

Exhibit 10.28

MERCURY GENERAL CORPORATION BOARD FEES

	PRIOR FEES	NEW FEES
Director Compensation – Quarterly	$3,000 per quarter	$4,000 per quarter
Director Compensation – Attendance	$3,000 per meeting	$4,000 per meeting held in person or telephonically lasting 1 hour or more
		$500 per meeting held telephonically
		lasting less than 1 hour
Audit Committee (Chair) – Attendance	$2,500 per meeting	$3,500 per meeting
Audit Committee (Non Chair) – Attendance	$2,500 per meeting	$2,500 per meeting
Audit Committee (Chair) – Annual Retainer	$1,500 annual retainer	$4,000 annual retainer
Compensation Committee – Attendance	$500 per meeting	$500 per meeting
Compensation Committee (Chair) – Annual Retainer	$150 per hour	$2,500 annual retainer
Corporate Governance (Chair) – Attendance	$1,500 per meeting	$1,500 per meeting
Corporate Governance Committee (Non Chair) -	$1,000 per meeting	$1,000 per meeting
Attendance
Corporate Governance (Chair) – Annual Retainer	$1,500 annual retainer	$1,500 annual retainer
Investment Committee – Attendance	$1,500 per meeting	$1,500 per meeting
Lead Director – Annual Retainer	None	$10,000 annual retainer

EX-10.34

EXECUTION VERSION

CREDIT AGREEMENT

Dated as of January 2, 2009

Among

MERCURY CASUALTY COMPANY,

as the Borrower,

MERCURY GENERAL CORPORATION,

as the Guarantor,

BANK OF AMERICA, N.A.,

as Administrative Agent

And

The Other Lenders Party Hereto

BANC OF AMERICA SECURITIES LLC,

as Sole Lead Arranger and Sole Book Manager

TABLE OF CONTENTS
ARTICLE I.		DEFINITIONS AND ACCOUNTING TERMS	1
	1.01	Defined Terms	1
	1.02	Other Interpretive Provisions	17
	1.03	Accounting Terms	18
	1.04	Rounding	18
	1.05	Times of Day	19
ARTICLE II.		THE LOANS	19
	2.01	Loans	19
	2.02	Initial Borrowing, Conversions and Continuations of Loans	19
	2.03	Prepayments	20
	2.04	Repayment of Loans	21
	2.05	Interest	21
	2.06	Fees	21
	2.07	Computation of Interest and Fees	22
	2.08	Evidence of Debt	22
	2.09	Payments Generally; Administrative Agent’s Clawback	22
	2.10	Sharing of Payments by Lenders	23
ARTICLE III.		TAXES, YIELD PROTECTION AND ILLEGALITY	24
	3.01	Taxes	24
	3.02	Illegality	27
	3.03	Inability to Determine Rates	27
	3.04	Increased Costs; Reserves on Eurodollar Rate Loans	28
	3.05	Compensation for Losses	29
	3.06	Mitigation Obligations; Replacement of Lenders	30
	3.07	Survival	30
ARTICLE IV.		CONDITIONS PRECEDENT TO LOANS	30
	4.01	Conditions of Effective Date	30
	4.02	Conditions to all Loans	32
ARTICLE V.		REPRESENTATIONS AND WARRANTIES	33
	5.01	Existence, Qualification and Power	33
	5.02	Authorization; No Contravention	33
	5.03	Governmental Authorization; Other Consents	33
	5.04	Binding Effect	33
	5.05	Financial Statements; No Material Adverse Effect	34
	5.06	Litigation	34
	5.07	No Default	35
	5.08	Ownership of Property; Liens	35
	5.09	Environmental Compliance	35
	5.10	Insurance	35

	5.11	Taxes	35
	5.12	ERISA Compliance	35
	5.13	Subsidiaries; Equity Interests	36
	5.14	Margin Regulations; Investment Company Act	36
	5.15	Disclosure	37
	5.16	Compliance with Laws	37
	5.17	Taxpayer Identification Number	37
	5.18	First Priority Security Interest	37
ARTICLE VI.		AFFIRMATIVE COVENANTS	37
	6.01	Financial Statements	37
	6.02	Certificates; Other Information	38
	6.03	Notices	41
	6.04	Payment of Obligations	41
	6.05	Preservation of Existence, Etc	42
	6.06	Maintenance of Properties	42
	6.07	Maintenance of Insurance	42
	6.08	Compliance with Laws	42
	6.09	Books and Records	42
	6.10	Inspection Rights	42
	6.11	Use of Proceeds	43
	6.12	Bank as Principal Depository	43
	6.13	Further Assurances	43
	6.14	Collateral Value	44
ARTICLE VII.		NEGATIVE COVENANTS	44
	7.01	Liens	44
	7.02	Investments	45
	7.03	Indebtedness	46
	7.04	Fundamental Changes	47
	7.05	Dispositions	47
	7.06	Restricted Payments	48
	7.07	Change in Nature of Business	49
	7.08	Transactions with Affiliates	49
	7.09	Burdensome Agreements	49
	7.10	Use of Proceeds	49
	7.11	Financial Covenants	49
ARTICLE VIII.		EVENTS OF DEFAULT AND REMEDIES	49
	8.01	Events of Default	49
	8.02	Remedies Upon Event of Default	51
	8.03	Application of Funds	52

ARTICLE IX.		ADMINISTRATIVE AGENT	52
	9.01	Appointment and Authority	52
	9.02	Rights as a Lender	53
	9.03	Exculpatory Provisions	53
	9.04	Reliance by Administrative Agent	54
	9.05	Delegation of Duties	54
	9.06	Resignation of Administrative Agent	54
	9.07	Non-Reliance on Administrative Agent and Other Lenders	55
	9.08	No Other Duties, Etc	55
	9.09	Administrative Agent May File Proofs of Claim	55
	9.10	Collateral Matters	55
ARTICLE X.		PARENT GUARANTEE	56
	10.01	Unconditional Guarantee	56
	10.02	Guarantee Absolute	56
	10.03	Waivers	57
	10.04	Subrogation	57
	10.05	Survival	58
	10.06	Severability	58
ARTICLE XI.		MISCELLANEOUS	58
	11.01	Amendments, Etc	58
	11.02	Notices; Effectiveness; Electronic Communication	59
	11.03	No Waiver; Cumulative Remedies; Enforcement	62
	11.04	Expenses; Indemnity; Damage Waiver	62
	11.05	Payments Set Aside	64
	11.06	Successors and Assigns	64
	11.07	Treatment of Certain Information; Confidentiality	67
	11.08	Right of Setoff	68
	11.09	Interest Rate Limitation	69
	11.10	Counterparts; Integration; Effectiveness	69
	11.11	Survival of Representations and Warranties	69
	11.12	Severability	69
	11.13	Replacement of Lenders	69
	11.14	Governing Law; Jurisdiction; Etc	70
	11.15	Waiver of Jury Trial	71
	11.16	California Proceedings	71
	11.17	No Advisory or Fiduciary Responsibility	72
	11.18	Electronic Execution of Assignments and Certain Other Documents	72
	11.19	USA PATRIOT Act	72
	11.20	Time of the Essence	73
	11.21	Entire Agreement	73

SCHEDULES
	1.01		Collateral Advance Rates
	2.01		Commitments and Applicable Percentages
	5.13		Subsidiaries; Other Equity Investments
	11.02		Administrative Agent’s Office; Certain Addresses for Notices
EXHIBITS
Form of
	A		Loan Notice
	B		Note
	C	-1	Compliance Certificate
	C	-2	Collateral Value Certificate
	D	-1	Assignment and Assumption
	D	-2	Administrative Questionnaire
	E	-1	Security Agreement
	E	-2	Control Agreement
	F		Opinion Matters

CREDIT AGREEMENT

This CREDIT AGREEMENT (“Agreement”) is entered into as of January 2, 2009, among MERCURY CASUALTY COMPANY, a California corporation (the “Borrower”), MERCURY GENERAL CORPORATION, a California corporation (the “Parent”), each lender from time to time party hereto (collectively, the “Lenders” and individually, a “Lender”), and BANK OF AMERICA, N.A., as Administrative Agent.

The Borrower has requested that the Lenders provide a term loan facility, and the Lenders are 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 I.                                

DEFINITIONS AND ACCOUNTING TERMS

1.01  Defined Terms.

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

"Account Bank" means any "bank" within the meaning of Section 9-102(a)(8) of the UCC at which any deposit account constituting a Collateral Account is held, which shall be

(a) located in the United States and (b) reasonably acceptable to the Administrative Agent.

“Act” has the meaning specified in Section 11.17.

“Acquisition” means the acquisition of all outstanding capital stock of AIS Management, LLC, a California limited liability company (“AIS”) which is the parent company of Auto Insurance Specialists, LLC, a California limited liability company, and Poliseek AIS Insurance Solutions, Inc.

“Acquisition Agreement” means the Stock Purchase Agreement by and among Aon Corporation, Aon Services Group, Inc. and the Borrower dated as of October 10, 2008 entered into in connection with the Acquisition.

“Acquisition Documents” means the Acquisition Agreement and the related documents delivered pursuant thereto.

“Adjusted Fair Market Value” means with respect to any Eligible Collateral, an amount equal to the product of the Fair Market Value of such Eligible Collateral and the applicable percentage with respect to such Eligible Collateral as set forth on Schedule 1.01.

“Administrative Agent” means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent.

“Administrative Agent’s Office” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 11.02, or such other address or account as the Administrative Agent may from time to time notify to the Borrower and the Lenders.

“Administrative Questionnaire” means an Administrative Questionnaire in substantially the form of Exhibit D-2 or any other form approved by the Administrative Agent.

“Affiliate” means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

“Aggregate Commitments” means the Commitments of all the Lenders.

“Agreement” means this Credit Agreement.

“Annual Statement” means with respect to any Insurance Subsidiary, the annual financial statement of such Insurance Subsidiary as required to be filed with the Applicable Insurance Regulatory Authority, together with all exhibits or schedules filed therewith, prepared in conformity with SAP.

“Applicable Percentage” means with respect to any Lender at any time, the percentage (carried out to the ninth decimal place) of such Lender’s Loans divided by the Outstanding Amount.  The initial Applicable Percentage of each Lender is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable.

“Applicable Insurance Regulatory Authority” means, with respect to any MaterialInsurance Subsidiary, the California Department of Insurance or similar Governmental Authority located in (x) the jurisdiction in which such Person is domiciled or (y) such other jurisdiction which due to the nature of such Person's activities, has regulatory authority over such Person, and any federal Governmental Authority regulating the insurance industry.

“Applicable Rate” means 1.25%.

“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“Arranger” means Banc of America Securities LLC, in its capacity as sole lead arranger and sole book manager.

“Assignee Group” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 11.06(b)), and accepted by the Administrative Agent, in substantially the form of Exhibit D-1 or any other form approved by the Administrative Agent.

“Attributable Indebtedness” means, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease.

“Bank of America” means Bank of America, N.A. and its successors.

“Base Rate” means for any day a fluctuating rate per annum equal to the highest 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 Bank of America as its “prime rate” and (c) the Eurodollar Rate for a one-month Interest Period commencing on such day plus 0.50%  The “prime rate” is a rate set by Bank of America based upon various factors including Bank of America’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 Bank of America 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 that bears interest at a rate based on the Base Rate.

“Borrower” has the meaning specified in the introductory paragraph hereto.

“Borrower Materials” has the meaning specified in Section 6.02.

“Borrower Statutory Surplus” means, on any date, the amount (determined in accordance with SAP) of the Borrower’s surplus as at the last day of any fiscal quarter ending on or most recently ended prior to such date.

“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 Administrative Agent’s Office is located or Los Angeles, California 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 London interbank eurodollar market.

“Cash” means Dollars held in a Collateral Account.

“Cash Equivalents” means at any time:

(a)           time deposits and certificates of deposit, maturing not more than two years after the date of determination, which are issued by the applicable Securities Intermediary; and

(b)           investments in money market funds or short-term asset management accounts offered by the Securities Intermediary which are acceptable to the Administrative Agent.

“Change in Law” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority.

“Change of Control” means 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 such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “option right”)), directly or indirectly, of 50% or more of the equity securities of the Parent entitled to vote for members of the board of directors or equivalent governing body of the Parent on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right);

(b)           during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Parent cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body 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 equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body 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 or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); or

(c)           the Parent ceases to own, directly or indirectly, 100% of the Equity Interests in the Borrower, free and clear of Liens.

“Closing Date” means the first date all the conditions precedent in Sections 4.01 and 4.02 are satisfied or waived in accordance with Section 11.01.

“Code” means the Internal Revenue Code of 1986.

“Collateral” means all property and assets that are from time to time subject to the Security Agreement.

Collateral Account” means (a) account no. 244398at The Bank of New York Mellon Trust Company, National Association as to which the Borrower, The Bank of New York Mellon Trust Company, National Association and the Administrative Agent have entered into a Control Agreement, and (b) any other account at The Bank of New York Mellon Trust Company, National Association or another Securities Intermediary or Account Bank as to which such Securities Intermediary or Account Bank, as the case may be, the Borrower and the Administrative Agent have entered into a Control Agreement.

“Collateral Value” means, on any date, an amount equal to the sum of the Adjusted Fair Market Value of all Eligible Collateral.

“Collateral Value Certificate” means a certificate substantially in the form of Exhibit C-2 with such changes therein as the Administrative Agent and the Borrower may reasonably agree from time to time.

“Compliance Certificate” means a certificate substantially in the form of Exhibit C-1.

“Consolidated Parent Debt” means, as of any date of determination, the balance sheet amount of the consolidated Indebtedness of the Parent and its Subsidiaries on that date.

“Consolidated Parent Net Worth” means, as of any date of determination, for the Parent and its Subsidiaries on a consolidated basis, Shareholders’ Equity of the Parent and its Subsidiaries on that date.

“Consolidated Statutory Net Income” means, for any period, for the Borrower, the net statutory income of the Borrower for that period excluding (a) extraordinary gains and extraordinary losses and (b) dividends and other distributions from its Subsidiaries and other Affiliates for such period, calculated in accordance with SAP.

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

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.  “Controlling” and “Controlled” have meanings correlative thereto.

“Control Agreement” means an agreement between the Borrower, the applicable Securities Intermediary or Account Bank, as the case may be, and the Administrative Agent with respect to any Collateral Account substantially in the form of Exhibit E-2 or such other form as may be reasonably acceptable to the Administrative Agent.

“Corporate Securities” means publicly traded debt securities (other than preferred stock) denominated in Dollars issued by a corporation, limited liability company, limited partnership or similar entity organized in the United States.

“Debtor Relief Laws” means the Bankruptcy Code of the United States, 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 or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

“Default” means any event or condition that constitutes an Event of Default or 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 (i) the Base Rate plus (ii) the Applicable Rate, if any, applicable to Base Rate Loans plus (iii) 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.

“Disposition” or “Dispose” means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.

“Dollar” and “$” mean lawful money of the United States.

“Eligible Assignee” means any Person that meets the requirements to be an assignee under Section 11.06(b)(iii), (v) and (vi) (subject to such consents, if any, as may be required under Section 11.06(b)(iii)).

“Eligible Collateral” means Cash, Cash Equivalents, Corporate Securities, Federal Agency Debt, Government Debt and Municipal Securities which (a) are denominated in Dollars, (b) if applicable, have the required rating and/or maximum tenor as set forth on Schedule 1.01, (c) are capable of being marked to market on a daily basis and capable of being cleared by the Depository Trust Company and (d) are held in a Collateral Account.

“Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.

“Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Parent or any of its Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

“Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

“ERISA” means the Employee Retirement Income Security Act of 1974.

“ERISA Affiliate” means any trade or business (whether or not incorporated) under common control with the Parent 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 Parent 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 (within the meanings of Sections 4203 and 4205 of ERISA) by the Parent or any ERISA Affiliate from a Multiemployer Plan or receipt by the Parent or any ERISA Affiliate of notice from any Multiemployer Plan that it is in “reorganization” (within the meaning of Section 4241 of ERISA); (d) the filing of a notice of intent by the plan administrator to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; or (e) an event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan.

“Eurodollar Rate” means, for any Interest Period with respect to a Eurodollar Rate Loan, the rate per annum equal to the British Bankers Association LIBOR Rate (“BBA LIBOR”), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period.  If such rate is not available at such time for any reason, then the “Eurodollar Rate” for such Interest Period shall be the rate per annum determined by the Administrative Agent to be the rate 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 by Bank of America and with a term equivalent to such Interest Period would be offered by Bank of America’s London Branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period.

“Eurodollar Rate Loan” means a Loan that bears interest at a rate based on the Eurodollar Rate.

“Event of Default” has the meaning specified in Section 8.01.

“Excluded Taxes” means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of a Loan Party hereunder, (a) Taxes imposed on or measured by its overall net income or gross receipts (however denominated), 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 such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable Lending Office is located, (b) any branch profits Taxes imposed by the United States or any similar Tax imposed by any other jurisdiction in which such Loan Party is located, (c) any backup withholding Tax that is withheld from amounts payable to a Lender that has failed to comply with clause (A) of Section 3.01(e)(ii), and (d) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 11.13 in which the Borrower has agreed to pay the applicable withholding taxes), any United Stateswithholding tax that (i) is imposed on amounts payable to such Foreign Lender pursuant to the Laws in force at the time such Foreign Lender becomes a party hereto (or designates a new Lending Office) or (ii) is attributable to such Foreign Lender’s failure or inability (other than as a result of a Change in Law) to comply with clause (B) of Section 3.01(e)(ii), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new Lending Office (or assignment), to receive additional amounts from such Loan Party with respect to such withholding tax pursuant to Section 3.01(a)(ii) or (iii).

“Existing Term Loan Agreement” means that certain Amended and Restated Loan Agreement dated as of January 2, 2009 between the Borrower and Bank of America.

“Fair Market Value” means (a) with respect to any Government Debt, Federal Agency Debt, or other publicly-traded security (other than those set forth in clause (b)) the closing price for such security on Bloomberg, Inc. or, if Bloomberg, Inc. is not available, another quotation service reasonably acceptable to the Administrative Agent, (b) with respect to Cash and Cash Equivalents, the amounts thereof, and (c) with respect to any Eligible Collateral (other than those set forth in clauses (a), and (b)), the price for such Eligible Collateral on the date of calculation obtained from a generally recognized source reasonably approved by the Administrative Agent or the most recent bid quotation from such approved source (or, if no generally recognized source exists as to such Eligible Collateral, any other source specified by the Borrower to which the Administrative Agent does not reasonably object).

“Federal Agency” means any of the following agencies of the federal government of the United States:  (a) Government National Mortgage Association; (b) the Export-Import Bank of the United States; (c) the Farmers Home Administration, an agency of the United States Department of Agriculture; (d) the United States General Services Administration; (e) the United States Maritime Administration; (f) the United States Small Business Administration; (g) the Commodity Credit Corporation; (h) the Rural Electrification Administration; (i) the Rural Telephone Bank; (j) Washington Metropolitan Area Transit Authority; (k) the Federal Home Loan Mortgage Corporation; (l) the Federal National Mortgage Association; (m) the Federal Housing Finance Board; (n) the Federal Home Loan Bank; and (o) such other federal agencies as are reasonably acceptable to the Administrative Agent.

“Federal Agency Debt” means evidence of Freely Transferable Indebtedness that constitutes obligations of a Federal Agency.

“Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (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 on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.

“Fee Letter” means the letter agreement, dated December 15, 2008, among the Loan Parties, the Administrative Agent and Bank of America and the Arranger.

“Foreign Lender” means any Lender that is organized under the Laws of a jurisdiction other than that in which the Borrower is resident for tax purposes.  For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

“Freely Transferable” means securities which are freely transferable and traded in established and recognized markets and as to which there are readily available price quotations.

“FRB” means the Board of Governors of the Federal Reserve System of the United States.

“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 activities.

“GAAP” means generally accepted accounting principles in the United States 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 in the United States, that are applicable to the circumstances as of the date of determination, consistently applied.

“Governmental Authority” means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).

“Government Debt” means Freely Transferable Indebtedness issued by the U.S. Treasury Department or backed by the full faith and credit of the United States.

“Guarantee” means, as to any Person, any (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing 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 or level of income or cash flow 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 obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee 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 (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien).  The amount of any Guarantee 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 Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith.  The term “Guarantee” as a verb has a corresponding meaning.

“Hazardous Materials” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.

“Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:

(a)           all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

(b)           all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments;

(c)           net obligations of such Person under any Swap Contract;

(d)           all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business);

(e)           indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;

(f)           capital leases and Synthetic Lease Obligations;

(g)           all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and

(h)           all Guarantees of such Person in respect of any of the foregoing.

For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person.  The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date.  The amount of any capital lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date.

“Indemnified Taxes” means Taxes other than Excluded Taxes.

“Indemnitees” has the meaning specified in Section 11.04(b).

“Information” has the meaning specified in Section 11.07.

“Insurance License” means any license, certificate of authority, permit or other authorization which is required to be obtained from any Governmental Authority in connection with the operation, ownership or transaction of insurance or reinsurance business.

“Insurance Subsidiary” means each of the Borrower and any other Subsidiary of the Parent which is licensed by any Governmental Authority to engage in the insurance and/or reinsurance business.

“Interim Statement” means with respect to any Insurance Subsidiary, any interim statutory financial statement or financial report (whether quarterly, semiannually or otherwise) of such Insurance Subsidiary as required to be filed with the Applicable Insurance Regulatory Authority, together with all exhibits or schedules filed therewith, prepared in conformity with SAP.

“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 and the Maturity Date; 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 or such other period that is twelve months or less requested by the Borrower and consented to by all the Lenders; 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;

(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 Maturity Date.

“Investment” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of capital stock or other securities of another Person or (b) a loan, advance or capital contribution to, Guarantee or assumption of debt of, or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person and any arrangement pursuant to which the investor Guarantees Indebtedness of such other Person.  For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment.

“IRS” means the United States Internal Revenue Service.

“Laws” means, collectively, all 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, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

“Lender” and “Lenders” have the meaning specified in the introductory paragraph hereto.

“Lending Office” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.

“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing).

“Loan” has the meaning specified in Section 2.01.

“Loan Documents” means this Agreement, each Note, the Security Agreement, the Control Agreement and the Fee Letter.

“Loan Notice” means a notice of (a) the initial borrowing hereunder, (b) a conversion of Loans from one Type to the other, or (c) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a), which, if in writing, shall be substantially in the form of Exhibit A.

“Loan Parties” means, collectively, the Borrower and the Parent.

“Margin Stock” has the meaning specified in Regulation U issued by the FRB.

“Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), operations or financial condition of the Borrower and its Subsidiaries taken as a whole or the Parent and its Subsidiaries taken as a whole; (b) a material impairment of the ability of any Loan Party 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 any Loan Party of any Loan Document to which it is a party.

“Material Insurance Subsidiary” means the Borrower and each other Insurance Subsidiary which is Material Party.

“Material Party” means each Loan Party and each Subsidiary of the Parent whose consolidated assets or revenues exceed 10% of the consolidated assets or revenues of the Parent and its Subsidiaries for the most recent fiscal quarter for which financial statements have been delivered pursuant to Section 6.01(a) or (b).

“Maturity Date” means January 2, 2012 if such date is not a Business Day, the Maturity Date shall be the next succeeding Business Day.

“Moody’s” means Moody’s Investors Service, Inc. and any successor thereto.

“Multiemployer Plan” means any “employee benefit plan” (as such term is defined in Section 3(3) of ERISA) of the type described in Section 4001(a)(3) of ERISA, to which the Parent or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions.

“Municipal Securities” means publicly traded debt securities issued by any state or municipality or subdivision or instrumentality thereunder located in the United States.

“NAIC” mans the National Association of Insurance Commissioners and any successor thereto.

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

“Obligations” means all advances to, and debts, liabilities, obligations, covenants and duties of, any Loan Party arising under any Loan Document or otherwise with respect to any Loan, 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 and fees that accrue after the commencement by or against any Loan Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.

“Organization Documents” means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization 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 or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity.

“Other Taxes” means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of this Agreement or any other Loan Document.

“Outstanding Amount” means the aggregate outstanding principal amount of Loans on any date after giving effect to any prepayments of Loans, occurring on such date.

“Parent” has the meaning specified in the introductory paragraph.

“Parent Debt to Capital Ratio” means the ratio, expressed as a percentage, of (a) Consolidated Parent Debt to (b) Parent Net Worth plus Consolidated Parent Debt.

“Parent Net Worth” means, as of any date of determination, the consolidated shareholders’ equity of the Parent calculated in accordance with GAAP.

“Participant” has the meaning specified in Section 11.06(d).

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

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Plan” means any “employee benefit plan” (as such term is defined in Section 3(3) of ERISA) established by the Parent or, with respect to any such plan that is subject to Section 412 of the Code or Title IV of ERISA, any ERISA Affiliate.

“Platform” has the meaning specified in Section 6.02.

“Post-Closing Filings” has the meaning specified in Section 5.03.

“Public Lender” has the meaning specified in Section 6.02.

“Register” has the meaning specified in Section 11.06(c).

“Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees and advisors of such Person and of such Person’s Affiliates.

“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.

“Required Lenders” means, as of any date of determination, Lenders holding in the aggregate more than 50%of the Outstanding Amount.  In the event that the Borrower or any of its Affiliates become the owner of Loans in accordance with Section 11.06(b)(v) or a participant in Loans in accordance with Section 11.06(d), such Person shall not have a vote and such Person’s Loans shall be excluded in calculating the Outstanding Amount for purposes of determining Required Lenders unless 100% of the Lenders approved the assignment of such Loans to such Person.

“Responsible Officer” means the chief executive officer, president, chief financial officer, corporate secretary, treasurer, assistant treasurer or controller of a Loan Party and, solely for purposes of notices given pursuant to Article II, any other officer of the applicable Loan Party so designated by any of the foregoing officers in a notice to the Administrative Agent.  Any document delivered hereunder that is signed by a Responsible Officer of a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Loan Party.

“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any capital stock or other Equity Interest of the Borrower, 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 other Equity Interest, or on account of any return of capital to the Borrower’s stockholders, partners or members (or the equivalent Person thereof).

“Risk Based Capital Ratio” means, as to any Material Insurance Subsidiary, the “risk based capital ratio” calculated in accordance with SAP pursuant to the requirements of the Applicable Insurance Regulatory Authority in such Material Insurance Subsidiary’s domicile.

“SAP” means, as to any Material Insurance Subsidiary, the accounting practices prescribed or permitted by NAIC, if then applicable to such Material Insurance Subsidiary, or the Applicable Insurance Regulatory Authority of the jurisdiction of domicile of such Material Insurance Subsidiary for the preparation of Annual Statements, Interim Statements and other financial reports by insurance companies of the same type as such Material Insurance Subsidiary.

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. and any successor thereto.

“SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

“Securities Intermediary” means any “securities intermediary” within the meaning of Section 8.102(a)(14) of the UCC at which any securities account constituting a Collateral Account is held, which shall be (a) located in the United States and (b) reasonably acceptable to the Administrative Agent.

“Security Agreement” means a security agreement substantially in the form of Exhibit E-1 entered into on the Closing Date.

“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 Parent.

“Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any Master Agreement.

“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender).

“Synthetic Lease Obligation” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).

“Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“Threshold Amount” means $25,000,000.

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

"UCC" means the Uniform Commercial Code as in effect from time to time in the State of New York.

“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.

“United States” and “U.S.” mean the United States of America.

“Unmatured Surviving Obligations” means, as of any date, Obligations that by their terms survive the termination of this Agreement or any other Loan Document and are not due and payable as of such date.

1.02  Other Interpretive Provisions.

With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document:

(a)The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.  The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.”  The word “will” shall be construed to have the same meaning and effect as the word “shall.”  Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document (including any Organization Document) shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “herein,” “hereof” and “hereunder,” and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear, (v) any reference to any law shall include all statutory and regulatory provisions consolidating, amending, replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

(b)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.”

(c)Section headings herein and in 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.

(a)Generally.  All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with GAAP or SAP, as applicable.

(b)Changes in GAAP or SAP.  If any change in GAAP or SAP from that used in preparing the financial statements described in Section 5.05 would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Required Lenders shall so request, the Administrative Agent, the Lenders 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 or SAP, as applicable (subject to the approval of the Required Lenders); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP or SAP, as applicable prior to such change therein and (ii) the Borrower shall provide to the Administrative Agent and the Lenders 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 or SAP, as applicable.

1.04  Rounding.

Any financial ratios required to be maintained by any Loan Party 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 herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).

1.05  Times of Day.

Unless otherwise specified, all references herein to times of day shall be references to California time (daylight or standard, as applicable).

ARTICLE II.                                

THE COMMITMENTS AND LOANS

2.01  Loans.

Subject to the terms and conditions set forth herein, each Lender severally agrees to make loans (each such loan, a “Loan”) to the Borrower on the Closing Date not to exceed $120,000,000.  Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein.

2.02  Initial Borrowing, Conversions and Continuations of Loans.

(a)The initial borrowing hereunder and each conversion of Loans from one Type to the other, and each continuation of Eurodollar Rate Loans shall be made upon the Borrower’s irrevocable notice to the Administrative Agent, which may be given by telephone.  Each such notice must be received by the Administrative Agent not later than 11:00 a.m. (i) three Business Days prior to the requested date of the initial borrowing hereunder of, or the conversion to or continuation of, Eurodollar Rate Loans or (ii) on the Business Day of the requested date of the initial borrowing hereunder of, or conversion to, Base Rate Loans; provided, however, that if the Borrower wishes to request Eurodollar Rate Loans having an Interest Period other than one, two, three or six months in duration as provided in the definition of “Interest Period,” the applicable notice must be received by the Administrative Agent not later than 11:00 a.m. four Business Days prior to the requested date of such conversion or continuation, whereupon the Administrative Agent shall give prompt notice to the Lenders of such request and determine whether the requested Interest Period is acceptable to all of them.  Not later than 11:00 a.m., three Business Days before the requested date of such conversion or continuation, the Administrative Agent shall notify the Borrower (which notice may be by telephone) whether or not the requested Interest Period has been consented to by all the Lenders..  Each telephonic notice by the Borrower pursuant to this Section 2.02(a) must be confirmed promptly by delivery to the Administrative Agent of a written Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower.  The initial borrowing hereunder of and each conversion to or continuation of Eurodollar Rate Loans shall be in a principal amount of $3,000,000 or a whole multiple of $500,000 in excess thereof.  The initial borrowing hereunder of or conversion to Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof.  Each Loan Notice (whether telephonic or written) shall specify (i) whether the Borrower is requesting the initial borrowing hereunder of, a conversion of Loans from one Type to the other, or a continuation of Eurodollar Rate Loans, (ii) the requested date of the initial borrowing hereunder, conversion or continuation, as the case may be (which shall be a Business Day), (iii) the principal amount of Loans to be borrowed, converted or continued, (iv) the Type of Loans to be borrowed or to which existing Loans are 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 Loans shall be made as, or converted to, Eurodollar Rate Loans with a one-month Interest Period.  Any such automatic conversion to Base Rate Loans shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Rate Loans.  If the Borrower requests a conversion to, or continuation of Eurodollar Rate Loans 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.  Notwithstanding the foregoing, the Borrower may request that Loans made on the Closing Date bear interest at a rate equal to the sum of (x) the “overnight rate” as quoted by the Administrative Agent on the Closing Date plus (y) the Applicable Rate provided the Borrower delivers to the Administrative Agent no later than 10:00 a.m. on the Closing Date (1) a Loan Notice requesting such rate and (2) a Loan Notice requesting conversion of the Loans made on the Closing Date to a Eurodollar Loan(s) on the second Business Day after the Closing Date.  Thereafter, all conversions and continuations shall be made in accordance with the provisions of this Section 2.02(a).

(b)Following receipt of a Loan Notice, the Administrative Agent shall promptly notify each Lender of the contents thereof, and if no timely notice of a conversion or continuation is provided by the Borrower, the Administrative Agent shall notify each Lender of the details of any automatic conversion to Eurodollar Rate Loans with a one-month Interest Period described in the preceding subsection.

(c)Except as otherwise provided herein, a Eurodollar Rate Loan may be continued or converted only on the last day of an Interest Period for such Eurodollar Rate Loan.  During the existence of an Event of Default, no Loans may be requested as, converted to or continued as Eurodollar Rate Loans without the consent of the Required Lenders.

(d)The Administrative Agent shall promptly notify the Borrower and the Lenders of the interest rate applicable to any Interest Period for Eurodollar Rate Loans upon determination of such interest rate.  At any time that Base Rate Loans are outstanding, the Administrative Agent shall notify the Borrower and the Lenders of any change in Bank of America’s prime rate used in determining the Base Rate promptly following the public announcement of such change.

(e)After giving effect to the outstanding Loans, 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 with respect to Loans.

2.03  Voluntary Prepayments.

The Borrower may, upon notice to the Administrative Agent, at any time or from time to time voluntarily prepay Loans in whole or in part without premium or penalty; provided that (i) such notice must be received by the Administrative Agent not later than 11:00 a.m. (A) three Business Days prior to any date of prepayment of Eurodollar Rate Loans and (B) on the date of prepayment of Base Rate Loans; (ii) any prepayment of Eurodollar Rate Loans shall be in a principal amount of $3,000,000 or a whole multiple of $500,000 in excess thereof; and (iii) any prepayment of Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof or, in each case, if less, the entire principal amount thereof then outstanding.  Each such notice shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid and, if Eurodollar Rate Loans are to be prepaid, the Interest Period(s) of such Loans.  The Administrative Agent will promptly notify each Lender of its receipt of each such notice, and of the amount of such Lender’s Applicable Percentage of such prepayment.  If the Borrower gives notice of voluntary prepayment to the Administrative Agent, the Borrower shall pay all accrued interest, together with any additional amounts required pursuant to Section 3.05.  Each such prepayment shall be applied to the Loans of the Lenders in accordance with their respective Applicable Percentages.  If such notice is given by the Borrower and such prepayment is not made on the date stipulated in the notice, the applicable Loans shall be automatically converted to Base Rate Loans on such date, and the Borrower shall pay all accrued interest and any additional amounts required pursuant to Section 3.05.  Amounts repaid may not be reborrowed.

2.04  Repayment of Loans.

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

2.05  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 or conversion date at a rate per annum equal to the Base Rate plus the Applicable Rate.

(b)(i)           If any amount of principal of any Loan is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.

(ii)If any amount (other than principal of any Loan) payable by the Borrower under any Loan Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, then upon the request of the Required Lenders, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.

(iii)Upon the request of the Required Lenders, while any Event of Default exists, the Borrower shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.

(iv)Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.

(v)The Administrative Agent shall notify the Borrower in writing of the imposition of the Default Rate.

(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.

2.06  Fees.

The Borrower shall pay to the Arranger and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Fee Letter.  Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.

2.07  Computation of Interest and Fees.

(a)All computations of interest for Base Rate Loans when the Base Rate is determined by Bank of America’s “prime rate” shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed.  All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year).  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.  Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.

2.08  Evidence of Debt.

The Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business.  The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Loans made by the Lenders to the Borrower and the interest and payments thereon.  Any failure to so 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 Obligations.  In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error.  Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through the Administrative Agent) a Note, which shall evidence such Lender’s Loans in addition to such accounts or records.  Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto.

2.09  Payments Generally; Administrative Agent’s Clawback.

(a)General.  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 Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the Administrative Agent’s Office in Dollars and in immediately available funds not later than 2:00 p.m. on the date specified herein.  The Administrative Agent will promptly distribute to each Lender its Applicable Percentage (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender’s Lending Office.  All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue.  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.

(b)Payments by Borrower; Presumptions by Administrative Agent.  Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due.  In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.  A notice of the Administrative Agent to the Borrower with respect to any amount owing under this subsection (b) shall be conclusive, absent manifest error.

(c) Obligations of Lenders Several.  The obligations of the Lenders hereunder to make Loans and to make payments pursuant to Section 11.04(c) are several and not joint.  The failure of any Lender to make any Loan, or to make any payment under Section 11.04(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan, or to make its payment under Section 11.04(c).

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

2.10  Sharing of Payments by Lenders.

If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Loans made by it, resulting in such Lender’s receiving payment of a proportion of the aggregate amount of such Loans and accrued interest thereon greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that:

(i)if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and

(ii)the provisions of this Section shall not be construed to apply to (x) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant (provided, however, if such assignment or participation was made to the Parent or any of its Affiliates or Subsidiaries other than in accordance with Section 11.06(b)(v) or (c), as applicable, the provisions of this Section shall apply to such payment).

Each Loan Party consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against such Loan Party rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Loan Party in the amount of such participation.

ARTICLE III.                                

TAXES, YIELD PROTECTION AND ILLEGALITY

3.01  Taxes.

(a)Payments Free of Taxes; Obligation to Withhold; Payments on Account of Taxes.

(i)Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall to the extent permitted by applicable Laws be made free and clear of and without reduction or withholding for any Taxes.  If, however, applicable Laws require the Borrower or the Administrative Agent to withhold or deduct any Tax, such Tax shall be withheld or deducted in accordance with such Laws as determined by the Borrower or the Administrative Agent, as the case may be, upon the basis of the information and documentation to be delivered pursuant to subsection (e) below.

(ii)If the Borrower or the Administrative Agent shall be required by the Code to withhold ordeduct any Taxes, including both United States Federal backup withholding and withholding taxes, from any payment, then (A) the Administrative Agent shall withhold or make such deductions as are determined by the Administrative Agent to be required based upon the information and documentation it has received pursuant to subsection (e) below, (B) the Administrative Agent shall timely pay the full amount withheld or deducted to the relevant Governmental Authority in accordance with the Code, and (C) to the extent that the withholding or deduction is made on account of Indemnified Taxes or Other Taxes, the sum payable by the Borrower shall be increased as necessary so that after any required withholding or the making of all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender, as the case may be, receives an amount equal to the sum it would have received had no such withholding or deduction been made.

(b)Payment of Other Taxes by the Borrower.  Without limiting the provisions of subsection (a) above, the Borrower shall timely pay, without duplication, any Other Taxes to the relevant Governmental Authority in accordance with applicable Laws.

(c)Tax Indemnifications.  (i) Without limiting the provisions of subsection (a) or (b) above, the Borrower shall, without duplication, and does hereby, indemnify the Administrative Agent and each Lender, and shall make payment in respect thereof within 10 days after demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) withheld or deducted by the Borrower or the Administrative Agent or paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority.  The Borrower shall also, and does hereby, indemnify the Administrative Agent, and shall make payment in respect thereof within 10 days after demand therefor, for any amount which a Lender for any reason fails to pay indefeasibly to the Administrative Agent as required by clause (ii) of this subsection.  A certificate as to the amount of any such payment or liability delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.

(ii)Without limiting the provisions of subsection (a) or (b) above, each Lender shall, and does hereby, indemnify the Borrower and the Administrative Agent, and shall make payment in respect thereof within 10 days after demand therefor, against any and all Taxes and any and all related losses, claims, liabilities, penalties, interest and expenses (including the fees, charges and disbursements of any counsel for the Borrower orthe Administrative Agent) incurred by or asserted against the Borrower or the Administrative Agent by any Governmental Authority as a result of the failure by such Lender to deliver, or as a result of the inaccuracy, inadequacy or deficiency of, any documentation required to be delivered by such Lender to the Borrower or the Administrative Agent pursuant to subsection (e).  Each Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under this Agreement or any other Loan Document against any amount due to the Administrative Agent under this clause (ii).  The agreements in this clause (ii) shall survive the resignation and/or replacement of the Administrative Agent, any assignment of rights by, or the replacement of, a Lender, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all other Obligations.

(d)Evidence of Payments. Upon request by the Borrower or the Administrative Agent, as the case may be, after any payment of Taxes by the Borrower or by the Administrative Agent to a Governmental Authority as provided in this Section 3.01, the Borrower shall deliver to the Administrative Agent or the Administrative Agent shall deliver to the Borrower, as the case may be, the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of any return required by Laws to report such payment or other evidence of such payment reasonably satisfactory to the Borrower or the Administrative Agent, as the case may be.

(e)Status of Lenders; Tax Documentation.  (i)  Each Lender shall deliver to the Borrower and to the Administrative Agent, at the time or times prescribed by applicable Laws or when reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation prescribed by applicable Laws or by the taxing authorities of any jurisdiction and such other reasonably requested information as will permit the Borrower or the Administrative Agent, as the case may be, to determine (A) whether or not payments made hereunder or under any other Loan Document are subject to Taxes, (B) if applicable, the required rate of withholding or deduction, and (C) such Lender’s entitlement to any available exemption from, or reduction of, applicable Taxes in respect of all payments to be made to such Lender by the Borrower pursuant to this Agreement or otherwise to establish such Lender’s status for withholding tax purposes in the applicable jurisdiction.

(ii)Without limiting the generality of the foregoing, if the Borrower is resident for tax purposes in the United States,

(A)any Lender that is a “United States person” within the meaning of Section 7701(a)(30) of the Code shall deliver to the Borrower and the Administrative Agent executed originals of Internal Revenue Service Form W-9 or such other documentation or information prescribed by applicable Laws or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent, as the case may be, to determine whether or not such Lender is subject to backup withholding or information reporting requirements; and

(B)each Foreign Lender that is entitled under the Code or any applicable treaty to an exemption from or reduction of withholding tax with respect to payments hereunder or under any other Loan Document shall deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Borrower or the Administrative Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable:

(1)executed originals of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party,

(2)executed originals of Internal Revenue Service Form W-8ECI,

(3)executed originals of Internal Revenue Service Form W-8IMY and all required supporting documentation,

(4)in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Code, (x) a certificate to the effect that such Foreign Lender is not (A) a “bank” within the meaning of section 881(c)(3)(A) of the Code, (B) a “10 percent shareholder” of the Borrower within the meaning of section 881(c)(3)(B) of the Code, or (C) a “controlled foreign corporation” described in section 881(c)(3)(C) of the Code and (y) executed originals of  Internal Revenue Service Form W-8BEN, or

(5)executed originals of any other form prescribed by applicable Laws as a basis for claiming exemption from or a reduction in United States Federal withholding tax together with such supplementary documentation as may be prescribed by applicable Laws to permit the Borrower or the Administrative Agent to determine the withholding or deduction required to be made.

(iii)Each Lender shall promptly (A) notify the Borrower and the Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction, and (B) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any requirement of applicable Laws of any jurisdiction that the Borrower or the Administrative Agent make any withholding or deduction for taxes from amounts payable to such Lender.

(f)Treatment of Certain Refunds.  Unless required by applicable Laws, at no time shall the Administrative Agent have any obligation to file for or otherwise pursue on behalf of a Lender, or have any obligation to pay to any Lender, any refund of Taxes withheld or deducted from funds paid for the account of such Lender.  If the Administrative Agent or any Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay to the Borrower an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses incurred by the Administrative Agent or such Lender, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority.  This subsection shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrower or any other Person.

3.02  Illegality.  If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Eurodollar Rate Loans, or to determine or charge interest rates based upon the Eurodollar Rate, or any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, any obligation of such Lender to make or continue Eurodollar Rate Loans or to convert Base Rate Loans to Eurodollar Rate Loans shall be suspended until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist.  Upon receipt of such notice, the Borrower shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Rate Loans of such Lender to Base Rate Loans, either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Loans.  Upon any such prepayment or conversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted.

3.03  Inability to Determine Rates.  If the Required Lenders determine that for any reason in connection with any request for a conversion to or continuation of a Eurodollar Rate Loan that (a) Dollar deposits are not being offered to banks in the London interbank eurodollar 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 Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or (c) the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, the Administrative Agent will promptly so notify the Borrower and each Lender.  Thereafter, the obligation of the Lenders to convert to or maintain Eurodollar Rate Loans shall be suspended until the Administrative Agent (upon the instruction of the Required Lenders) revokes such notice.  Upon receipt of such notice, the Borrower may revoke any pending request for a conversion to or continuation of Eurodollar Rate Loans or, failing that, will be deemed to have converted such request into a request for a conversion to or continuation of Base Rate Loans in the amount specified therein.

3.04  Increased Costs; Reserves on Eurodollar Rate Loans.

(a)Increased Costs Generally.  If any Change in Law shall:

(i)impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement contemplated by Section 3.04(e));

(ii)subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Eurodollar Rate Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Indemnified Taxes or Other Taxes covered by Section 3.01 and the imposition of, or any change in the rate of, any Excluded Tax payable by such Lender); or

(iii)impose on any Lender or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Rate Loans made by such Lender;

and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Rate Loan (or of maintaining its obligation to make any such Loan), or to increase the cost to such Lender, or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or any other amount) then, upon request of such Lender, the Borrower will pay to such Lender, as the case may be, such additional amount or amounts as will compensate such Lender, as the case may be, for such additional costs incurred or reduction suffered.

(b)Capital Requirements.  If any Lender determines that any Change in Law affecting such Lender or any Lending Office of such Lender or such Lender’s holding company, if any, regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement, or the Loans made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c)Certificates for Reimbursement.  A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in subsection (a) or (b) of this Section and delivered to the Borrower shall be conclusive absent manifest error.  The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 Business Days after receipt thereof.

(d)Delay in Requests.  Failure or delay on the part of any Lender to demand compensation pursuant to the foregoing provisions of this Section shall not constitute a waiver of such Lender’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender pursuant to the foregoing provisions of this Section for any increased costs incurred or reductions suffered more than six months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof).

(e)Reserves on Eurodollar Rate Loans.  The Borrower shall pay to each Lender, as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as “Eurocurrency liabilities”), additional interest on the unpaid principal amount of each Eurodollar Rate Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive), which shall be due and payable on each date on which interest is payable on such Loan, provided the Borrower shall have received at least 10 Business Days’ prior notice (with a copy to the Administrative Agent) of such additional interest from such Lender.  If a Lender fails to give notice 10 Business Days prior to the relevant Interest Payment Date, such additional interest shall be due and payable 10 Business Days from receipt of such notice.

3.05  Compensation for Losses.  Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, the Borrower shall promptly compensate such Lender for and hold such 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);

(b)any failure by the Borrower 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; or

(c)any assignment of a Eurodollar Rate Loan on a day other than the last day of the Interest Period therefor as a result of a request by the Borrower pursuant to Section 11.13;

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 such Lender in connection with the foregoing.  Notwithstanding the foregoing, the Borrower shall not be liable to pay such amounts in the event that a Eurodollar Loan is not continued or a Base Rate Loan is not converted into a Eurodollar Loan in accordance with the Borrower’s Loan Notice for the same due to a written request of a Lender pursuant to Section 3.02 or a written notice from the Required Lenders pursuant to Section 3.03.

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

3.06  Mitigation Obligations; Replacement of Lenders.

(a)Designation of a Different Lending Office.  If any Lender requests compensation under Section 3.04, or the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01, or if any Lender gives a notice pursuant to Section 3.02, then such Lender shall use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.01 or 3.04, as the case may be, in the future, or eliminate the need for the notice pursuant to Section 3.02, as applicable, and (ii) in each case, would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender.  The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

(b)Replacement of Lenders.  If any Lender requests compensation under Section 3.04, or if any Lender gives a notice pursuant to Section 3.02, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01, the Borrower may replace such Lender in accordance with Section 11.13.

3.07  Survival.

All of the Borrower’s obligations under this Article III shall survive, repayment of all other Obligations hereunder and resignation of the Administrative Agent.

ARTICLE IV.                                

CONDITIONS PRECEDENT TO LOANS

4.01  Documentary Conditions of Closing Date.

The obligation of each Lender to make the Loans hereunder is subject to the Administrative Agent’s receipt of the following, each of which shall be originals, electronic copies or facsimiles (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the signing Loan Party, 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 and number reasonably satisfactory to the Administrative Agent and each of the Lenders:

(a)Executed counterparts of this Agreement and the Security Agreement.

(b)Such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Loan Party as the Administrative Agent may reasonably require evidencing the identity, 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 such Loan Party is a party.

(c)Such documents and certifications as the Administrative Agent may reasonably require to evidence that each Loan Party is duly organized or formed, and that each Loan Party is validly existing, in good standing and qualified to engage in business in each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification including, in the case of the Borrower, certificates from the California Department of Insurance and any other Applicable Insurance Regulatory Authority having jurisdiction over the Borrower, except to the extent that failure to be so qualified could not reasonably be expected to have a Material Adverse Effect.

(d)A favorable opinion of legal counsel to the Loan Parties,  addressed to the Administrative Agent and each Lender, as to the matters set forth in Exhibit F and such other matters concerning the Loan Parties and the Loan Documents as the Required Lenders may reasonably request.

(e)A certificate of a Responsible Officer of each Loan Party either (A) attaching copies of all consents, licenses and approvals required in connection with the execution, delivery and performance by such Loan Party and the validity against such Loan Party of the Loan Documents to which it is a party, and such consents, licenses and approvals shall be in full force and effect, or (B) stating that no such consents, licenses or approvals are so required.

(f)A certificate of a Responsible Officer of the Borrower certifying (A) a true and correct copy of the Acquisition Documents, (B) that concurrent with making of the Loans, the closing of the Acquisition will occur in accordance with the terms of the Acquisition Documents without waiver of any material condition thereof, and (C) the Acquisition complies in all material respects with applicable legal requirements, and all necessary consents and approvals from any Governmental Authority required for the consummation of the Acquisition were duly obtained, and continue to be in full force and effect, except for such requirements, consents or approvals that would not, in the aggregate, have a Material Adverse Effect.

(g)A certificate signed by a Responsible Officer of the Borrower certifying that after giving effect to the closing of the Acquisition and making of the Loans (A) no Default or Event of Default shall have occurred and be continuing under the Loan Documents or will result from the making of the Loan, (B) all warranties and representations contained in this Agreement are  true and correct in all material respects as of the date hereof; and (C) no Material Adverse Effect has occurred since September 30, 2008.

(h)A duly completed Compliance Certificate on a proforma basis after giving effect to the Acquisition as of the last day of the fiscal quarter of the Parent ended on September 30, 2008, signed by a Responsible Officer of the Borrower and the Parent.

(i)A duly completed Collateral Value Certificate calculated as of the most recent Business Day signed by a Responsible Officer of the Borrower.

(j)A Control Agreement with respect to the Collateral Account executed by the parties thereto.

(k)Such other assurances, certificates, documents, consents or opinions as the Administrative Agent or the Lenders reasonably may require.

4.02  Conditions Precedent to Loans.

The obligation of each Lender to make Loans is further subject to the following conditions precedent:

(a)The Administrative Agent shall have received reasonably satisfactory evidence that the Lenders have a valid and perfected first priority lien and security interest in the Collateral.

(b)The absence of any action, suit, investigation or proceeding pending or, to the knowledge of the Borrower, threatened in any court or before any arbitrator or governmental authority that could reasonably be expected to have a Material Adverse Effect or restrain, enjoin or otherwise prohibit the Acquisition.

(c)The Borrower shall have a financial strength rating by A.M. Best Company, Inc. of A- stable or better.

(d)There shall have been no amendment to the Acquisition Agreement that is adverse to the Lenders (and the Lenders shall have received a copy of all amendments) except such amendments as have received the written approval of the Administrative Agent (such approval not to be unreasonably withheld or delayed).

(e)The receipt of any material governmental and other third party approvals required for the intended use of the proceeds of the Senior Credit Facility, the granting of the Collateral and the Acquisition.

(f)All conditions precedent in the Acquisition Documents (other than payment of the purchase price thereunder) have been satisfied or otherwise waived (with the approval of the Administrative Agent (such approval not to be unreasonably withheld or delayed)) and the closing thereunder shall occur on the Closing Date.

(g)The Existing Credit Agreement shall have been (or concurrently with the Closing Date is being) amended in a manner reasonably satisfactory to the Administrative Agent to revise the statutory surplus covenant and provide for collateral for the obligations thereunder on the same terms and conditions as this Agreement.

(h)The Lenders shall have received two year projections for the Loan Parties giving effect to the Acquisition.

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

(j)Unless waived by the Administrative Agent, the Borrower shall have paid all fees, charges and disbursements of counsel to the Administrative Agent (directly to such counsel if requested by the Administrative Agent) to the extent invoiced prior to the Closing Date, plus such additional amounts of such fees, charges and disbursements as shall constitute its reasonable estimate of such fees, charges and disbursements 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 Administrative Agent).

ARTICLE V.                                

REPRESENTATIONS AND WARRANTIES

Each Loan Party represents and warrants to the Administrative Agent and the Lenders on the Closing Date that:

5.01  Existence, Qualification and Power.

The Parent and each Subsidiary (a) is duly organized or formed, validly existing and, as applicable, in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own or lease its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, and (c) is duly qualified and is licensed and, as applicable, 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; except in each case referred to in clause (b)(i) or (c), 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 each Loan Party of each Loan Document to which such Person is party, 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 such Person’s Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any Contractual Obligation to which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries, which could reasonably be expected to have a Material Adverse Effect, or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any Law.

5.03  Governmental Authorization; Other Consents.

No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Loan Party of this Agreement or any other Loan Document; except (a) for approvals, consents, exemptions, authorizations, actions, notices or filings (i) which have already been obtained or made or (ii) for which the failure to obtain or make could not reasonably be expected to have a Material Adverse Effect and such failure could be cured without unreasonable delay or cost and (b) the Borrower is required to file post-closing reports pursuant to California Insurance Code section 1185 et seq. with the California Department of Insurance and NAIC with respect to the Acquisition and the Borrower’s granting of Collateral pursuant to the Loan Documents (the “Post-Closing Filings”).

5.04  Binding Effect.

This Agreement has been, and each other Loan Document, when delivered hereunder, will have been, duly executed and delivered by each Loan Party that is party thereto.  This Agreement constitutes, and each other Loan Document when so delivered will constitute, a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms.

5.05  Financial Statements; No Material Adverse Effect.

(a)The unaudited consolidated balance sheet of the Parent and its Subsidiaries dated September 30, 2008, and the related consolidated statements of income or operations, shareholders’ equity and cash flows for the fiscal quarter ended on that date (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly present the financial condition of the Parent and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments.

(b)(i)           The Annual Statement of the Borrower as of and for the year ending December 31, 2007 (including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities) as filed with the Applicable Insurance Regulatory Authority and the Interim Statement of the Borrower as of and for the calendar quarter ended September 30, 2008 as filed with the Applicable Insurance Regulatory Authority (collectively, the “Statutory Financial Statements”), have been prepared in all material respects in accordance with SAP applied on a consistent basis (except as noted therein).  Each such Statutory Financial Statement was in material compliance with applicable Law when filed.  The Statutory Financial Statements fairly present the financial position, the results of operations, changes in equity and changes in financial position of the Borrower as of and for the respective dates and periods indicated therein in accordance with SAP applied on a consistent basis, except as set forth in the notes thereto.

(c)The Investments of the Borrower reflected in the Statutory Financial Statements comply in all material respects with all applicable requirements of the California Department of Insurance as well as those of any other Applicable Insurance Regulatory Authority relating to Investments in respect of which the Borrower may invest its funds.

(d)The provisions made by the Borrower in the Statutory Financial Statements for reserves, policy and contract claims and statutory liabilities are in compliance in all material respects with the requirements of the Applicable Insurance Regulatory Authority, and have been computed in accordance with SAP.

(e)Marketable securities and short term investments reflected in the Statutory Financial Statements are valued at cost, amortized cost or market value, as required by applicable Law.

(f)Since September 30, 2008, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect.

5.06  Litigation.

There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of either Loan Party after due and diligent investigation, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, by or against the Parent or any of its Subsidiaries or against any of their properties or revenues that (a) purport to affect the validity or enforceability of this Agreement or any other Loan Document, or the consummation of any of the transactions contemplated hereby, or (b) either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

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

5.08  Ownership of Property; Liens.  Each of the Parent and each Subsidiary has good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

5.09  Environmental Compliance.  The Parent and its Subsidiaries conduct in the ordinary course of business a review of the effect of existing Environmental Laws and claims alleging potential liability or responsibility for violation of any Environmental Law on their respective businesses, operations and properties, and as a result thereof the Parent has reasonably concluded thatsuch Environmental Laws and claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

5.10  Insurance.  The properties of the Parent and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Parent, in such amounts (after giving effect to any self-insurance compatible with the following standards), 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 Parent or the applicable Subsidiary operates.

5.11  Taxes.  The Parent and its Subsidiaries have filed all material Federal, state and other tax returns and reports required to be filed (taking into account extensions), and have paid all material Federal, state and other 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 diligently conducted and for which adequate reserves have been provided in accordance with GAAP.  To the knowledge of the Borrower, there is no proposed tax assessment against the Parent or any Subsidiary that could reasonably be expected to have a Material Adverse Effect.  

5.12  ERISA Compliance.

(a)Except as could not reasonably be expected to have a Material Adverse Effect, (i) each Plan is in compliance with the applicable provisions of ERISA, the Code and other Federal or state Laws; (ii)  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 each Loan Party, nothing has occurred which would prevent, or cause the loss of, such qualification; and (iii) the Parent 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 either Loan Party, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that could 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 reasonably be expected to result in a Material Adverse Effect.

(c)Except as could not reasonably be expected to have 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 Loan Party 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 Loan Party 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 Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Loan Party nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA.

5.13  Subsidiaries; Equity Interests.  As of the Closing Date, (a) the Parent has no Subsidiaries other than those specifically disclosed in Part (a) of Schedule 5.13, and all of the outstanding Equity Interests in such Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Person and in the amounts specified on Part (a) of Schedule 5.13 free and clear of all consensual Liens and such Schedule correctly indicates, as of the Closing Date, whether such Subsidiary is a Material Party, an Insurance Subsidiary or a Material Insurance Subsidiary, and (b) the Parent and its Subsidiaries do not have any equity investments in any other corporation or entity other than those specifically disclosed in Part(b) of Schedule 5.13 or, in the case of Insurance Subsidiaries, maintained in their investment portfolio in the ordinary course of business.  

5.14  Margin Regulations; Investment Company Act.

(a)The Borrower is not engaged, 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 FRB), or extending credit for the purpose of purchasing or carrying margin stock.  Less than 25% of the assets of the Borrower and its Subsidiaries (taken as a whole) consists of Margin Stock.

(b)None of the Parent, any Person Controlling the Parent, or any Subsidiary is or is required to be registered as an “investment company” under the Investment Company Act of 1940.

5.15  Disclosure.  The Parent has disclosed to the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect.  No report, financial statement, certificate or other information furnished (whether in writing or orally) by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or under any other Loan Document (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time such projected financial information was prepared.

5.16  Compliance with Laws.  The Parent and each Subsidiary is in compliance in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

5.17  Taxpayer Identification Number.  Each Loan Party’s true and correct U.S. taxpayer identification number is set forth on Schedule 11.02.

5.18  First Priority Security Interest.  The Administrative Agent, for the benefit of the Lenders, has a first priority perfected security interest in the Collateral pledged by the Borrower pursuant to the Security Agreement.

5.19  Insurance Licenses.  Each Insurance Subsidiary has all Insurance Licenses necessary to conduct its business except to the extent the failure to have such Insurance License would not have a Material Adverse Effect.  Except as set forth in its SEC filings, to the best of the each Loan Party’s knowledge, (a) no Insurance License of any Insurance Subsidiary is the subject of a proceeding for suspension or revocation or any similar proceedings, (b) there is no sustainable basis for such a suspension or revocation, and (c) no such suspension or revocation is threatened by any Applicable Insurance Regulatory Authority; except, in each case referred to in clauses (a)-(c), to the extent that such event could not reasonably be expected to have a Material Adverse Effect.

ARTICLE VI.                                

AFFIRMATIVE COVENANTS

So long as any Loan or other Obligation (other than Unmatured Surviving Obligations) hereunder shall remain unpaid or unsatisfied, the Loan Parties shall, and shall (except in the case of the covenants set forth in Sections 6.01, 6.02, 6.03, and 6.14) cause each Subsidiary to:

6.01  Financial Statements.  Deliver to the Administrative Agent:

(a)as soon as available, but in any event within ninety (90) days after the end of each fiscal year of the Parent (commencing with the fiscal year ended December 31, 2008), a consolidated balance sheet of the Parent and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income or operations, statement of shareholders’ equity, and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and prepared in accordance with GAAP, such consolidated statements to beaudited and accompanied by a report and opinion of KPMG or another independent certified public accountant of nationally recognized standing reasonably acceptable to the Required Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any “going concern” or like qualification or exception or any qualification or exception as to the scope of such audit;

(b)as soon as available, but in any event within fifty-five (55) days after the end of each of the first three fiscal quarters of each fiscal year of the Parent (commencing with the fiscal quarter ended March 31, 2009), a consolidated balance sheet of the Parent and its Subsidiaries as at the end of such fiscal quarter, the related consolidated statements of income or operations for such fiscal quarter and for the portion of the Parent's fiscal year then ended, and cash flows for the portion of the Parent's fiscal year then ended, in each case setting forth in comparative form, as applicable, 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, certified by the chief executive officer, chief financial officer, treasurer or controller of the Parent as fairly presenting the financial condition, results of operations, shareholders’ equity and cash flows of the Parent and its Subsidiaries in accordance with GAAP, subject only to year-end audit adjustments and the absence of footnotes;

(c)within five (5) Business Days after the applicable regulatory filing date, but in any event not later than fifty-five (55) days after the end of each calendar quarter (commencing with the calendar quarter ended March 31, 2009) in respect of which an Interim Statement is required to be filed, a copy of each Interim Statement of the Borrower for such calendar quarter, prepared in accordance with SAP;

(d)within five (5) Business Days after the applicable regulatory filing date for each calendar year (commencing with the filing for calendar year ended December 31, 2008), but in any event within ninety (90) days after the end of each calendar year, a copy of the Annual Statement of the Borrower for such calendar year prepared in accordance with SAP; and

(e)within five (5) Business Days after the applicable regulatory filing date for each calendar year (commencing with the filing for calendar year ended December 31, 2008), but in any event prior to June 10th of the year in which such filing is required, a copy of the annual audit for the Borrower for such calendar year prepared in accordance with the Annual Audited Financial Reports instructions contained in the annual statement instructions prepared by the NAIC from time to time by KPMG or other independent public accountants of recognized national standing.

As to any information contained in materials furnished pursuant to Section 6.02(c), the Parent shall not be separately required to furnish such information under clause (a) or (b) above, but the foregoing shall not be in derogation of the obligation of the Borrower to furnish the information and materials described in clauses (a) and (b) above at the times specified therein.

6.02  Certificates; Other Information.  Deliver to the Administrative Agent:

(a)concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b) (commencing with the delivery of the financial statements for the fiscal year ended December 31, 2008), a duly completed Compliance Certificate signed by the chief executive officer, chief financial officer, treasurer or controller of the Borrower and the Parent;

(b)promptly after any written request by the Administrative Agent or any 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 a Loan Party by independent accountants in connection with the accounts or books of the Parent or any Subsidiary, or any audit of any of them;

(c)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 Parent, and copies of all annual, regular, periodic and special reports and registration statements which the Parent may file or be required to file with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to the Administrative Agent pursuant hereto;

(d)within fifteen (15) days after being delivered to any Material Insurance Subsidiary, any final Report on Examination issued by the Applicable Insurance Regulatory Authority or the NAIC that results in material adjustments to the financial statements referred to in Sections 6.01(c), (d) or (e);

(e)promptly, upon written request of the Administrative Agent, a copy of each “Statement of Actuarial Opinion” and “Management Discussion and Analysis” for any Material Insurance Subsidiary which is required to be provided to the Applicable Insurance Regulatory Authority as to the adequacy of loss reserves of such Person;

(f)within five (5) Business Days of receipt, a copy of any financial examination reports by any Applicable Insurance Regulatory Authority with respect to any Material Insurance Subsidiary relating to the insurance business of such Person (when, and if, prepared); provided, such Material Insurance Subsidiary shall only be required to deliver any interim report hereunder at such time as such Material Insurance Subsidiary has knowledge that a final report will not be issued and delivered to the Administrative Agent, within ninety (90) days of any such interim report;

(g)within five (5) Business Days of such notice, notice of actual suspension, termination or revocation of any material Insurance License of any Material Insurance Subsidiary by any Applicable Insurance Regulatory Authority;

(h)promptly upon notice thereof, any change in the A.M. Best Rating financial strength rating of any Material Insurance Subsidiaries;

(i)as soon as available, but in any event within 10 Business Days after the end of each calendar month of each fiscal year, a Collateral Value Certificate executed by a Responsible Officer of the Borrower calculated as of the last Business Day of such calendar month;

(j)promptly, at the request of the Administrative Agent, a Collateral Value Certificate for any given Business Day executed by a Responsible Officer of the Borrower calculated as of the close of business on such Business Day; and

(k)promptly, such additional information regarding the business, financial or corporate affairs of the Parent or any Subsidiary, or compliance with the terms of the Loan Documents, as the Administrative Agent or any Lender may from time to time reasonably request;

(l)promptly after filing, a copy of the Post-Closing Filings.

Documents required to be delivered pursuant to Section 6.01(a) or (b) or Section 6.02(c) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which such documents are posted on the Parent’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests in writing the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents.  Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the Compliance Certificates required by Section 6.02(b) to the Administrative Agent.  Except for such Compliance Certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.

The Loan Parties hereby acknowledge that (a) the Administrative Agent and/or the Arranger will make available to the Lenders materials and/or information provided by or on behalf of the Loan Parties hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “Platform”) and (b) certain of the Lenders (each, a “Public Lender”) may have personnel who do not wish to receive material non-public information with respect to the Parent or its Affiliates, or the respective securities of any of the foregoing, and who may be engaged in investment and other market-related activities with respect to such Persons’ securities.  Each Loan Party hereby agrees that (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, the Arranger and the Lenders to treat such Borrower Materials as not containing any material non-public information with respect to the Borrower or its securities for purposes of United States Federal and state securities laws (provided, however, that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 11.07); (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated “Public Side Information;” and (z) the Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform that is not designated “Public Side Information.”

6.03  Notices.  Promptly notify the Administrative Agent and each Lender:

(a)of the occurrence of any Default;

(b)of the commencement of, or any material development in, any litigation or proceeding affecting the Borrower or any of its Subsidiaries involving an amount in excess of 10% of Borrower Statutory Surplus as calculated as of the most recently ended fiscal quarter for which statutory statements were delivered or were required to be delivered pursuant to Section 6.01(c) or (d).

(c)of the commencement of, or any material development in, any litigation or proceeding affecting the Parent or any Subsidiary other than the Borrower and its Subsidiaries that could reasonably be expected to have a Material Adverse Effect;

(d)of receipt of notice from any Governmental Authority notifying the Borrower or any of its  Insurance Subsidiaries of a hearing relating to a suspension, termination or revocation of any Insurance License, including any request by a Governmental Authority which commits the Borrower or any of its Subsidiaries to take, or refrain from taking, any action or which otherwise materially and adversely affects the authority of the Borrower or any such Insurance Subsidiary to conduct its business;

(e)(i) any breach or non-performance of, or any default under, a Contractual Obligation of the Parent or any Subsidiary and (ii) of any dispute, litigation, investigation, proceeding or suspension between a Material Insurance Subsidiary and any Governmental Authority, in each case, to the extent the same has resulted or could reasonably be expected to result in a Material Adverse Effect;

(f)of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect;

(g)of the occurrence of any ERISA Event;

(h)of any material change in accounting policies or financial reporting practices by the Parent or any Material Party;

(i)notice of any actual or, to the Borrower’s knowledge, proposed set-off, claims, withholdings or other defenses to which any material portion of the Collateral or the Administrative Agent’s rights with respect to any material portion of the Collateral are subject;

(j)of any announcement by A.M. Best & Company, Inc. of any change in or change in the outlook for a financial strength rating by A.M Best Company, Inc. of any Material Insurance Subsidiary, and

(k)of any announcement by S&P or Moody’s of any change in the Parent’s non-credit-enhanced, senior unsecured long-term debt.

Each notice pursuant to this Section 6.03 (a), (b), (c) or (d) 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 and any 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 material obligations and liabilities, including (a) all material 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 diligently conducted and adequate reserves in accordance with GAAP are being maintained by the Parent or such Subsidiary; (b) all material lawful claims which, if unpaid, would by law become a Lien upon its property; and (c) all material Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness.

6.05  Preservation of Existence, Etc.  (a) 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 7.04 or 7.05; (b) take all reasonable action to maintain all rights, privileges, permits, licenses and franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (c) 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 Parent, 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 (after giving effect to any self-insurance compatible with the following standards) 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 and all orders, writs, injunctions and decrees applicable to it or to its business or property, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted; or (b) the failure to comply therewith could not reasonably be 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, as applicable consistently applied shall be made of all financial transactions and matters involving the assets and business of the Parent 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 Parent or such Subsidiary, as the case may be.

6.10  Inspection Rights.  Permit representatives and independent contractors of the Administrative Agent and each 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 as long as no Event of Default has occurred and is continuing, the Borrower shall not bear the expense of more than one visit per year; provided, further, that when an Event of Default exists the Administrative Agent or any Lender (or any of their respective 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.

6.11  Use of Proceeds.  Use the proceeds of the Loans to make the Acquisition and pay fees and expenses in connection therewith and hereunder.

6.12  Bank as Principal Depository.  To, and cause each of its Subsidiaries to, maintain Bank of America as its primary depository bank, including for the maintenance of business, cash management, operating and administrative deposit accounts.  

6.13  Further Assurances.  Promptly upon the request of the Administrative Agent, the Borrower shall execute, acknowledge, deliver and record and do any and all such further acts and deeds as the Administrative Agent may reasonably request from time to time in order to insure that the Obligations are secured by a first priority perfected interest  in the assets of the Borrower stated to be pledged pursuant to the Security Agreement and to perfect and maintain the validity, effectiveness and priority of the Security Agreement and the Liens created thereby.  Without the prior written consent of the Administrative Agent, the Borrower shall not give directions or entitlement orders to the Securities Intermediary party to any Control Agreement to make a delivery to the Borrower or any other Person of assets or properties from the Collateral Account except in connection with the sale of the Eligible Collateral the proceeds of which will be deposited into the Collateral Account.  The Administrative Agent, on behalf of the Lenders, agrees that provided (i) no Default exists and is continuing and (ii) after giving effect to the proposed delivery, the Collateral Value is equal to or in excess of the Outstanding Amount, the Administrative Agent shall consent to and give instructions to the holder of the Collateral Account permitting any such delivery within one Business Day of a request.

6.14  Collateral Value.  (a) For purposes of calculating Collateral Value on any date, the Adjusted Fair Market Value of the following shall be excluded: (i) any Collateral which directly includes sub-prime mortgage assets, (ii) the portion of any issue of Eligible Collateral (other than Government Debt) which exceeds 10% of the Adjusted Fair Market Value of all Eligible Collateral, (iii) without duplication of any amount excluded pursuant to clause (ii), the portion of Eligible Collateral of any issuer (other than Government  Debt) which exceeds 10% of the Adjusted Fair Market Value of all Eligible Collateral, (iv) the portion of the Eligible Collateral that is rated A-/A3, BBB+/Baa1 or BBB/Baa2 and exceeds 20% of the Adjusted Fair Market Value of all Eligible Collateral, and (v) without duplication of any amount excluded pursuant to clause (iv), the portion of the Eligible Collateral that is rated BBB+/Baa1 or BBB/Baa2 and exceeds 10% of the Adjusted Fair Market Value of all Eligible Collateral.

(b)           If at any time the Outstanding Amount shall exceed (the amount of such excess, the "Collateral Shortfall") the Collateral Value for three consecutive Business Days, an Event of Default shall occur unless within three Business Days of the date the Collateral Shortfall occurred no Collateral Shortfall exists as a result of (i) a change in the Collateral Value due to market fluctuations, (ii) a deposit of additional securities in the Collateral Account and/or (iii) prepayment of the Outstanding Amount.  Any prepayment made pursuant to this Section 6.14(b) shall be made without premium or penalty provided any prepayment of a Eurodollar Rate Loan shall be accompanied by all accrued interest on the amount prepaid, together with any additional amounts required pursuant to Section 3.05.  Each such prepayment shall be applied to the Loans of the Lenders in accordance with their respective Applicable Percentages.  Amounts so prepaid may not be reborrowed.

ARTICLE VII.                                           

NEGATIVE COVENANTS

The Loan Parties agree that so long as any Loan or other Obligation (other than Unmatured Surviving Obligations) hereunder shall remain unpaid or unsatisfied:

7.01  Liens.  The Borrower shall not, and shall not permit its Subsidiaries 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 pursuant to any Loan Document;

(b)Liens securing the Existing Term Loan Agreement provided that the outstanding principal amount thereof does not exceed $18,000,000 or any additional amount permitted pursuant to Section 7.03(b);

(c)Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, 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 60 days or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

(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 and leases (other than Indebtedness), 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;

(h)Liens on assets other than the Collateral or any Equity Interests in any Subsidiary of the Borrower provided the amount of outstanding Indebtedness and other obligations (other than judicial judgments(including surety and appeal bonds)) secured thereby does not exceed $50,000,000 at any time; and

(i)Liens on assets other than the Collateral and any Equity Interest in any Subsidiary of the Borrower securing judicial judgments (including surety and appeal bonds) provided the outstanding amount secured thereby does not exceed $100,000,000 at any time.

7.02  Investments.  The Material Insurance Subsidiaries shall not make any Investments, except:

(a)Investments disclosed on Schedule 5.14;

(b)Investments maintained in such Material Insurance Subsidiary's investment portfolio in the ordinary course of business and in compliance with applicable Law;

(c)Investments by such Material Insurance Subsidiary in its Subsidiaries or by a Subsidiary of such Material Insurance Subsidiary in such Material Insurance Subsidiary; and

(d)Trade accounts receivables.

7.03  Indebtedness.  The Borrower and its Subsidiaries shall not create, incur, assume or suffer to exist any Indebtedness except:

(a)Indebtedness under the Loan Documents;

(b)Indebtedness under the Existing Term Loan Agreement  and 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 interest and other reasonable amounts paid, and fees and expenses reasonably incurred, in connection with such refinancing;

(c)obligations (contingent or otherwise) existing or arising under any Swap Contract, provided that (i) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with fluctuations in interest rates or foreign exchange rates, (ii) such Swap Contract is not (and is not required by GAAP to be) accounted for as speculative in nature, and (iii) such Swap Contract does not contain any provision exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party;

(d)Guarantees of Indebtedness permitted pursuant to this Section 7.03;

(e)Indebtedness owed to any Person providing property, casualty or liability insurance to the Borrower or any Subsidiary of the Borrower, so long as the outstanding amount of such Indebtedness does not exceed $5,000,000 at any time, and shall be incurred only to defer the cost of, such insurance for the year in which such Indebtedness is incurred and such Indebtedness shall be outstanding only during such year;

(f)(i)  Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is extinguished within five Business Days of its incurrence, (ii) Indebtedness in respect of credit cards provided the outstanding amount of such Indebtedness does not exceed $500,000 at any time and is extinguished within 60 days from the date of invoice, and (iii) Indebtedness in respect of purchase cards provided such Indebtedness is extinguished within 60 days from the date of invoice;

(g)contingent (but not matured) reimbursement, indemnification or similar obligations (including any arising by right of subrogation) of the Borrower or of one or more Subsidiaries in respect of stay or appeal bonds; and

(h)Indebtedness not exceeding an aggregate principal amount of $150,000,000 at any time outstanding.

7.04  Fundamental Changes.  The Parent shall not, and shall not permit any of its Subsidiaries to, merge, dissolve, liquidate, consolidate with or into another Person, or acquire (whether in one transaction or in a series of transactions) all or substantially all of its assets of or Equity Interests in, or assets which constitute a business unit of, any Person, or except that:

(a)so long as no Default exists or would result therefrom, the Borrower or any of its Subsidiaries may acquire (in one transaction or a series of transactions) the assets of any Person which constitute a business unit provided that the aggregate purchase price paid for all such acquisitions in any fiscal year does not exceed 10% of the Statutory Surplus of the Borrower as of the most recently ended fiscal year;

(b)so long as no Default exists or would result therefrom, any Subsidiary (other than the Borrower or its Subsidiaries) may merge with (i) the Parent, provided that the Parent shall be the continuing or surviving person, or (ii) any one or more other Subsidiaries (other than the Borrower or any of its subsidiaries);

(c)so long as no Default exists or would result therefrom, any Subsidiary of the Borrower may merge with (i) the Borrower, provided that the Borrower shall be the continuing or surviving Person, or (ii) any one or more other Subsidiaries of the Borrower;

(d)so long as no Default exists or would result therefrom, the Borrower may merge or consolidate with any Person (other than the Parent) provided (i) either the Borrower is the continuing or surviving Person or the continuing or surviving Person is organized in the United States and assumes all obligations under this Agreement and the other Loan Documents to which the Borrower is a party in a manner reasonably satisfactory to the Administrative Agent and (ii) the Borrower has provided the Lenders with advance notice of such merger or consolidation and provided a pro forma Compliance Certificate giving effect to such merger or consolidation;

(e)so long as no Default exists or would result therefrom, the Parent may merge or consolidate with any Person (other than the Borrower) provided that (i) such merger or consolidation does not result in a Change of Control, (ii) either the Parent is the continuing or surviving Person or the continuing or surviving Person is organized in the United States and assumes all obligations under this Agreement and the other Loan Documents to which the Parent is a party in a manner reasonably satisfactory to the Administrative Agent and (iii) the Parent has provided the Lenders with advance notice of such merger or consolidation and provided a pro forma Compliance Certificate giving effect to such merger or consolidation; and

(f)the Parent or any of its Subsidiaries (other than the Borrower and its Subsidiaries) may purchase or otherwise acquire all or substantially all the assets or Equity Interests in, any other Person provided (i) no Default exists or would result thereof and (ii) the Borrower has provided the Lenders with advance notice of such acquisition and provided a pro forma Compliance Certificate giving effect to such acquisition.

7.05  Dispositions.  The Parent and its Subsidiaries shall not make any Disposition or enter into any agreement to make any Disposition, except:

(a)Dispositions of obsolete or worn out property or property no longer useful in the business of Parent and its Subsidiaries, whether now owned or hereafter acquired, in the ordinary course of business;

(b)Dispositions of Investments in the ordinary course of business;

(c)Dispositions of equipment or real property to the extent that (i) such property is exchanged for credit against the purchase price of similar replacement property or (ii) the proceeds of such Disposition are reasonably promptly applied to the purchase price of such replacement property;

(d)Dispositions of property by any Subsidiary (other than the Borrower or one of its Subsidiaries) to the Parent or another Subsidiary;

(e)Dispositions of property by the Parent or any Subsidiary (other than the Borrower or one of its Subsidiaries) for fair market value;

(f)Dispositions by the Borrower or any of its Subsidiaries for fair market value in an aggregate amount not exceeding 10% of the Borrower's Statutory Surplus in any calendar year provided (x) no Default exists or would result therefrom and (y) after giving effect to such transaction the Loan Parties would be in pro forma compliance with Section 7.11;

(g)leases, subleases, licenses or sublicenses of property in the ordinary course of business and which do not materially interfere with the business of the Parent and its Subsidiaries;

(h)transfers of property subject to casualty events upon receipt of the insurance payments with respect to such casualty event;

(i)sales or discounts without recourse of accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof; and

(j)Dispositions by any Subsidiary of the Borrower to the Borrower or another Subsidiary of the Borrower.

7.06  Restricted Payments.  The Borrower shall not declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, (other than dividends paid in capital stock) if a Default exists or would occur as a result of such payment.

7.07  Change in Nature of Business.  The Parent shall not, and shall not permit any of its Subsidiaries to , engage in any material line of business substantially different from those lines of business conducted by the Parent and its Subsidiaries on the date hereof or any business substantially related or incidental thereto.

7.08  Transactions with Affiliates.  The Parent shall not, and shall not permit any of its Subsidiaries to, enter into any transaction of any kind with any Affiliate of the Parent, whether or not in the ordinary course of business, other than on fair and reasonable terms substantially as favorable to the Parent or such Subsidiary as would be obtainable by the Parent or such Subsidiary at the time in a comparable arm’s length transaction with a Person other than an Affiliate, provided that the foregoing restriction shall not apply to transactions between or among the Parent and any of its Subsidiaries or between and among any Subsidiaries.

7.09  Burdensome Agreements.  The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any Contractual Obligation (other than this Agreement or any other Loan Document or the Existing Term Loan Agreement) that (a) limits the ability (i) of any Subsidiary of the Borrower to make Restricted Payments to the Borrower to otherwise transfer property to the Borrower, (ii) of any Subsidiary of the Borrower to Guarantee the Indebtedness of the Borrower or (iii) of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist Liens on property of such Person; provided, however, that this clause (iii) shall not prohibit any negative pledge incurred or provided in favor of any holder of secured Indebtedness permitted under Section 7.01 and Section 7.03) solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness; or (b) requires the grant of a Lien to secure an obligation of such Person if a Lien is granted to secure another obligation of such Person, except in each case for prohibitions or restrictions existing under or by reason of:

(i)           customary non-assignment provisions with respect to leases or licensing agreements entered into by the Borrower or any of its Subsidiaries, in each case entered into in the ordinary course of business and consistent with past practices; and

(ii)           any restriction or encumbrance with respect to any asset of the Borrower or any of its Subsidiaries imposed pursuant to an agreement which has been entered into for the sale or disposition of such assets or all or substantially all of the capital stock or assets of such Subsidiary, so long as such sale or disposition is permitted under this Agreement.

7.10  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 FRB) or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose.

7.11 Financial Covenants.

(a)Borrower Statutory Surplus.  The Borrower shall not permit the Borrower Statutory Surplus to be less than an amount equal to the sum of (a) $750,000,000 plus (b) 25% of Borrower Statutory Net Income earned in each calendar year commencing with the calendar year ending December 31, 2008.

(b)Debt to Capital Ratio.  The Parent shall not permit the Parent Debt to Capital Ratio to exceed thirty- percent (30%).

(c)Risk Based Capital Ratio.  The Loan Parties shall not permit the Risk Based Capital Ratio of the Borrower or any other Material Insurance Subsidiary to be less than 200%.

ARTICLE VIII.                                           

EVENTS OF DEFAULT AND REMEDIES

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

(a)Non-Payment.  The Borrower or any other Loan Party 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 interest on any Loan, or any 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.  Any Loan Party fails to perform or observe any term, covenant or agreement contained in any of Section 6.03, 6.05(a), 6.10, 6.11, 6.13 or 6.14 or Article VII; or Article X.

(c)Financial Information.  Any Loan Party fails to perform or observe any term, covenant or agreement contained in Section 6.01 or 6.02 on its part to be performed or observed and such failure continues for 10 days after the earlier of (i) written notice from the Administrative Agent of such failure or (ii) the date a Responsible Officer becomes aware of such failure;

(d)Other Defaults.  Any Loan Party fails to perform or observe any other covenant or agreement (not specified in subsection (a), (b) or (c) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days after the earlier of (i) written notice from the Administrative Agent of such failure or (ii) the date a Responsible Officer becomes aware of such failure; or

(e)Representations and Warranties.  Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of the Borrower or any other Loan Party herein, in any other Loan Document, or in any document delivered in connection herewith or therewith shall be incorrect or misleading in any material respect when made or deemed made; or

(f)Cross-Default.  (i) The Parent or any Material Subsidiary (A) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness (other than Indebtedness hereunder and Indebtedness under Swap Contracts) having an aggregate outstanding principal amount (including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than the Threshold Amount, or (B) 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 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, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity; or (ii) there occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (A) any event of default under such Swap Contract as to which the Parent or any Material Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (B) any Termination Event (as so defined) under such Swap Contract as to which the Parent or any Material Subsidiary is an Affected Party (as so defined) and, in either event, the Swap Termination Value owed by the Parent or such Material Subsidiary as a result thereof is greater than the Threshold Amount; or

(g)Insolvency Proceedings, Etc.  Any Loan Party or any of its Subsidiaries that are Material Parties 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 material 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

(h)Inability to Pay Debts; Attachment.  (i) The Parent or any Subsidiary that is a Material Party 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 remains unsatisfied, unreleased, unvacated or unfully bonded for a period of 30 consecutive days after its issue or levy; or

(i)Judgments.  There is entered against the Parent or any Subsidiary that is a Material Party (i) one or more final judgments or orders for the payment of money in an aggregate amount (as to all such judgments or orders) exceeding the Threshold Amount (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage), or (ii) any one or more non-monetary final judgments that have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor upon such judgment or order, or (B) there is a period of 30 consecutive days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect and such judgment is not satisfied; 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 Parent 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 which has resulted or could reasonably be expected to result in a liability of the Borrower 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 as expressly permitted hereunder or thereunder or satisfaction in full of all the Obligations (other than Unmatured Surviving Obligations), ceases to be in full force and effect; or any Borrower or any other Person contests in any manner the validity or enforceability of any Loan Document; or any 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 the Administrative Agent shall cease to have a first priority perfected Lien on any Collateral;

(l)Government Action.  (a) Any Insurance License of the Borrower or any of its Material Insurance Subsidiaries (i) shall be revoked by the Applicable Insurance Regulatory Authority, (ii) shall be suspended by the Applicable Insurance Regulatory Authority for a period in excess of thirty days or (iii) shall not be reissued or renewed by the Applicable Insurance Regulatory Authority upon the expiration thereof following application for such reissuance or renewal of such Person, or (b) any Applicable Insurance Regulatory Authority shall issue any order of conservation or seizure, however denominated, relating to the Borrower or any Material Insurance Subsidiary or shall take any other action to exercise Control (i) over the Borrower or any Material Insurance Subsidiary or (ii) over any assets of the Borrower or any Material Insurance Subsidiary; which, in the case of each of clauses (a) and (b) above, would reasonably be expected to have a Material Adverse Effect.

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

8.02  Remedies Upon Event of Default.  If any Event of Default occurs and is continuing, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, take any or all of the following actions:

(a)declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts 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

(b)exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents;

provided, however, that upon the occurrence of an actual or deemed entry of an order for relief with respect to the Borrower under the Bankruptcy Code of the United States, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, in each case without further act of the Administrative Agent or any Lender.

8.03  Application of Funds.  After the exercise of remedies provided for in Section 8.02, any amounts received on account of the Obligations (including proceeds of Collateral) shall be applied by the Administrative Agent in the following order:

First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and amounts payable under Article III) payable to the Administrative Agent in its capacity as such;

Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders (including fees, charges and disbursements of counsel to the respective Lenders (including fees and time charges for attorneys who may be employees of any Lender) and amounts payable under Article III), ratably among them in proportion to the respective amounts described in this clause Second payable to them;

Third, to payment of that portion of the Obligations constituting accrued and unpaid interest on the Loans and other Obligations, ratably among the Lenders in proportion to the respective amounts described in this clause Third payable to them;

Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans, ratably among the Lenders in proportion to the respective amounts described in this clause Fourth held by them;

Last, the balance, if any, after all of the Obligations (other than Unmatured Surviving Obligations) have been indefeasibly paid in full, to the Borrower or as otherwise required by Law.

ARTICLE IX.                                

ADMINISTRATIVE AGENT

9.01  Appointment and Authority.  Each of the Lenders hereby irrevocably appoints Bank of America to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.  The provisions of this Article (other than the consent right of the Borrower contained in Section 9.06) are solely for the benefit of the Administrative Agent and the Lenders and no Loan Party shall have rights as a third party beneficiary of any of such provisions.

9.02  Rights as a Lender.  The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity.  Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.

9.03  Exculpatory Provisions.  The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents.  Without limiting the generality of the foregoing, the Administrative Agent:

(a)shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

(b)shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law; and

(c)shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.

The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 11.01 and 8.02) or (ii) in the absence of its own gross negligence or willful misconduct.  The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Administrative Agent by the Borrower or a Lender.

The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

9.04  Reliance by Administrative Agent.  The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person.  The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon.  In determining compliance with any condition hereunder to the making of a Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan.  The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

9.05  Delegation of Duties.  The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent.  The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties.  The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

9.06  Resignation of Administrative Agent.  The Administrative Agent may at any time give notice of its resignation to the Lenders and the Borrower.  Upon receipt of any such notice of resignation, the Required Lenders shall have the right, with the consent of the Borrower (such consent not to be unreasonably withheld or delayed), to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States.  If no such successor shall have been so appointed by the Required Lenders and consented to by the Borrower and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders, appoint a successor Administrative Agent meeting the qualifications set forth above and consented to by the Borrower; provided that if the Administrative Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment or the Borrower has not consented to such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders under any of the Loan Documents, the retiring Administrative Agent shall continue to hold such collateral security until such time as a successor Administrative Agent is appointed) and (2) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent and the Borrower consents to such appointment, as provided for above in this Section.  Notwithstanding the foregoing, consent of the Borrower shall not be required during the existence of an Event of Default.  Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section).  The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor.  After the retiring Administrative Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 11.04 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent.

9.07  Non-Reliance on Administrative Agent and Other Lenders.  Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.  Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.

9.08  No Other Duties, Etc.  Anything herein to the contrary notwithstanding, none of the Bookrunners or Arrangers listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder.

9.09  Administrative Agent May File Proofs of Claim.  In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise

(a)to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 2.06 and 11.04) allowed in such judicial proceeding; and

(b)to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.06 and 11.04.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

9.10           Collateral Matters.  The Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, to release any Lien on any property granted to or held by the Administrative Agent under any Loan Document (i) upon payment in full of all Obligations (other than Unmatured Surviving Obligations), (ii) as permitted hereunder or under any other Loan Document, or (iii) subject to Section 11.01, if approved, authorized or ratified in writing by the Required Lenders.  Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent’s authority to release such Collateral

ARTICLE X.                                

PARENT GUARANTEE

10.01  Unconditional Guarantee.  For valuable consideration, receipt whereof is hereby acknowledged, and to induce each Lender to make Loans to the Borrower and to induce the Administrative Agent to act hereunder, the Parent hereby unconditionally and irrevocably guarantees to each Lender and the Administrative Agent the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all Obligations of the Borrower, whether for principal, interest, fees, expenses, indemnification or otherwise, whether direct or indirect, absolute or contingent or now existing or hereafter arising (such Obligations being the "Guaranteed Obligations").  Without limiting the generality of the foregoing, the Parent’s liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by the Borrower to the Administrative Agent or any Lender under this Agreement but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Borrower or its Affiliates.  This is a guarantee of payment and not of collection merely.

10.02  Guarantee Absolute.  The Parent guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, regardless of any law or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Lender or the Administrative Agent with respect thereto.  The Obligations of the Parent under this Article X are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against the Parent to enforce this Article X, irrespective of whether any action is brought against the Borrower or whether the Borrower is joined in any such action or actions.  The liability of the Parent under this guarantee shall be irrevocable, absolute and unconditional irrespective of, and the Parent hereby irrevocably waives any defense it may now or hereafter have in any way relating to, any or all of the following:

(a)any lack of validity or enforceability of this Agreement, any other Loan Document or any other agreement or instrument relating thereto;

(b)any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from this Agreement (other than this Article X) (provided that nothing in this clause (b) shall modify any right that the Parent has to approve amendments to the Loan Documents);

(c)any taking, exchange, release or non-perfection of any collateral or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations;

(d)any change, restructuring or termination of the corporate structure or existence of the Borrower or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or any of its assets or any resulting release or discharge of any obligation of the Borrower under this Agreement; or

(e)any other circumstance (including, without limitation, any statute of limitations to the fullest extent permitted by applicable law) which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Parent or the Borrower (other than a discharge arising from the payment in full of the Guaranteed Obligations).

This guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by any Lender or the Administrative Agent upon the insolvency, bankruptcy or reorganization of the Parent or otherwise, all as though such payment had not been made.

10.03  Waivers.

(a)The Parent hereby expressly waives promptness, diligence, notice of acceptance, presentment, demand for payment, protest, any requirement that any right or power be exhausted or any action be taken against the Borrower or against any other guarantor of all or any portion of the Guaranteed Obligations, and all other notices and demands whatsoever.

(b)The Parent hereby waives any right to revoke this guaranty, and acknowledges that this guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future and regardless of whether Guaranteed Obligations are reduced to zero at any time or from time to time (other than a reduction to zero due to the payment in full in cash of the Guaranteed Obligations).

(c)The Parent acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated herein and that the waivers set forth in this Article X are knowingly made in contemplation of such benefits.

10.04  Subrogation.  The Parent will not exercise any rights that it may now or hereafter acquire against the Borrower or any other guarantor that arise from the existence, payment, performance or enforcement of the Guaranteed Obligations under this Agreement, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of the Administrative Agent, or any Lender against the Borrower or any other guarantor or any Collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from the Borrower or any other guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations (other than Unmatured Surviving Obligations) shall have been paid in full in cash.  If any amount shall be paid to the Parent in violation of the preceding sentence at any time prior to the later of the payment in full in cash of the Guaranteed Obligations (other than Unmatured Surviving Obligations), such amount shall be held in trust for the benefit of the Administrative Agent, and the Lenders and shall forthwith be paid to the Administrative Agent to be credited and applied to the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms of this Agreement, or to be held as collateral for any Guaranteed Obligations thereafter arising.

10.05  Survival.  This guaranty is a continuing guarantee and shall (a) remain in full force and effect until payment in full in cash of the Guaranteed Obligations, (b) be binding upon the Parent and its successors and assigns, (c) inure to the benefit of and be enforceable by each Lender (including each assignee Lender pursuant to Section 11.06), and the Administrative Agent and their respective successors, transferees and assigns and (d) shall be reinstated if at any time any payment to a Lender or the Administrative Agent hereunder is required to be restored by such Lender or the Administrative Agent.  Without limiting the generality of the foregoing clause (c), any transferee of any interest in any Loan of a Lender pursuant to Section 11.06 shall become vested with all the rights in respect thereof granted to such Lender herein or otherwise.

10.06  Severability.  Notwithstanding any other provision of this Article X to the contrary, in the event that any action is brought seeking to invalidate the Parent’s obligations under this Article X under any fraudulent conveyance or fraudulent transfer theory, the Parent shall be liable under this Article X only for an amount equal to the maximum amount of liability that could have been incurred under applicable law by the Parent under any guarantee of the Obligations of the Borrower (or any portion thereof) at the time of the execution and delivery of this Agreement (or, if such date is determined not to be the appropriate date for determining the enforceability of the Parent’s obligations under this Article X for fraudulent conveyance or transfer purposes, on the date determined to be so appropriate) without rendering such a hypothetical guarantee voidable under applicable law relating to fraudulent conveyance or fraudulent transfer (the “Maximum Guaranteed Obligations”) and not for any greater amount, as if the stated amount of the Guaranteed Obligations had instead been the Maximum Guaranteed Obligations.

ARTICLE XI.                                

MISCELLANEOUS

11.01  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 or any other Loan Party therefrom, shall be effective unless in writing signed by the Required Lenders and the Borrower and the Parent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such amendment, waiver or consent shall:

(a)waive any condition set forth in Section 4.01(a) without the written consent of each Lender;

(b)postpone any date fixed by this Agreement or any other Loan Document for any payment (excluding mandatory prepayments resulting from a Collateral shortfall) of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby;

(c)reduce the principal of, or the rate of interest specified herein on, any Loan or (subject to clause (ii) of the second proviso to this Section 11.01) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; provided, however, that only the consent of the Required Lenders shall be necessary to amend the definition of “Default Rate” or to waive any obligation of the Borrower to pay interest at the Default Rate;

(d)change Section 2.09. Section 2.10 or Section 8.03 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender;

(e)change any provision of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder without the written consent of each Lender; or

(f)except as expressly provided in this Agreement or any other Loan Document, release all or substantially all of the Collateral without the consent of each Lender; provided, however, that only the consent of the Required Lenders shall be necessary to amend the definition of “Eligible Collateral,” the “Adjusted Fair Market Value,” or any other related definition or the Collateral advance rates on Schedule 1.01;

(g)release the Parent from its obligations under the Article X without the written consent of each Lender;

and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto.

11.02  Notices; Effectiveness; Electronic Communication.

(a)Notices Generally.  Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:

(i)if to a Loan Party or the Administrative Agent, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 11.02; and

(ii)if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.

Notices and other communications sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices and other communications sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient).  Notices and other communications delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).

(b)Electronic Communications.  Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures reasonably approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication.  The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

(c)The Platform.  THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.”  THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS.  NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM.  In no event shall the Administrative Agent or any of its Related Parties (collectively, the “Agent Parties”) have any liability to the Borrower, any Lender or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrower’s or the Administrative Agent’s transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided, however, that in no event shall any Agent Party have any liability to the Borrower, any Lender or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).

(d)Change of Address, Etc.  Each of the Borrower and the Administrative Agent may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto.  Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower and the Administrative Agent.  In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.  Furthermore, each Public Lender agrees to cause at least one individual at or on behalf of such Public Lender to at all times have selected the “Private Side Information” or similar designation on the content declaration screen of the Platform in order to enable such Public Lender or its delegate, in accordance with such Public Lender’s compliance procedures and applicable Law, including United States Federal and state securities Laws, to make reference to Borrower Materials that are not made available through the “Public Side Information” portion of the Platform and that may contain material non-public information with respect to the Borrower or its securities for purposes of United States Federal or state securities laws.

(e)Reliance by Administrative Agent and Lenders.The Administrative Agent and the Lenders 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 Administrative Agent, each Lender and the Related Parties of each of them 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 other than any such losses, claims, damages, liabilities or expenses that are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of the Administrative Agent, any Lender or any Related Party of any of them.  All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.

11.03  No Waiver; Cumulative Remedies; Enforcement.  No failure by any Lender or the Administrative Agent 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 provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Loan Documents against the Loan Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, the Administrative Agent in accordance with Section 8.02 for the benefit of all the Lenders; provided, however, that the foregoing shall not prohibit (a) the Administrative Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Administrative Agent) hereunder and under the other Loan Documents, (b) any Lender from exercising setoff rights in accordance with Section 11.08 (subject to the terms of Section 2.10), or (c) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to any Loan Party under any Debtor Relief Law; and provided, further, that if at any time there is no Person acting as Administrative Agent hereunder and under the other Loan Documents, then (i) the Required Lenders shall have the rights otherwise ascribed to the Administrative Agent pursuant to Section 8.02 and (ii) in addition to the matters set forth in clauses (b) and (c) of the preceding proviso and subject to Section 2.10, any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.

11.04  Expenses; Indemnity; Damage Waiver.

(a)Costs and Expenses.  The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent), in connection with the syndication of the credit facilities (excluding any fees paid to the Lenders in connection with the syndication) provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Administrative Agent or any Lender (including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent or any Lender), and shall pay all reasonable fees and time charges for attorneys who may be employees of the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (B) in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans.

(b)Indemnification by the Borrower.  The Borrower shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee), and shall indemnify and hold harmless each Indemnitee from all fees and time charges and disbursements for attorneys who may be employees of any Indemnitee, incurred by any Indemnitee or asserted against any Indemnitee by any third party or by the Borrower or any other Loan Party arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder, the consummation of the transactions contemplated hereby or thereby, or, in the case of the Administrative Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Loan Documents (including in respect of any matters addressed in Section 3.01), (ii) any Loan or the use or proposed use of the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party, and regardless of whether any Indemnitee is a party thereto, IN ALL CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLE NEGLIGENCE OF THE INDEMNITEE; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee, (y) result from a claim brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or under any other Loan Document, if the Borrower or such other Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction, or (z) to the extent such amounts relate to Taxes and are governed by Section 3.01.

(c)Reimbursement by Lenders.  To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under subsection (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof) or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent) or such Related Party, as the case may be, such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) in connection with such capacity.  The obligations of the Lenders under this subsection (c) are subject to the provisions of Section 2.09(c).

(d)Waiver of Consequential Damages, Etc.  To the fullest extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof.  No Indemnitee referred to in subsection (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed to such unintended recipients by such Indemnitee through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby other than for direct or actual damages resulting from the gross negligence or willful misconduct of such Indemnitee as determined by a final and nonappealable judgment of a court of competent jurisdiction.

(e)Payments.  All amounts due under this Section shall be payable not later than ten Business Days after demand therefor.

(f)Survival.  The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Lender and the repayment, satisfaction or discharge of all the other Obligations.

11.05  Payments Set Aside.  To the extent that any payment by or on behalf of the Borrower is made to the Administrative Agent or any Lender, or the Administrative Agent or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff 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 Administrative Agent or such 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 (a) 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 setoff had not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect.  The obligations of the Lenders under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement.

11.06  Successors and Assigns.

(a)Successors and Assigns Generally.  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 neither the Borrower nor any other Loan Party may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto 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, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b)Assignments by Lenders.  Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that any such assignment shall be subject to the following conditions:

(i)Minimum Amounts.

(A)in the case of an assignment of the entire remaining amount of the assigning Lender’s Loans at the time owing to it or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and

(B)in any case not described in subsection (b)(i)(A) of this Section, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided, however, that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met.

(ii)Proportionate Amounts.  Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loans assigned.

(iii)Required Consents.  No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition:

(A)the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund;

(B)the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required if such assignment is to a Person that is not a Lender, an Affiliate of such Lender or an Approved Fund with respect to such Lender;

(iv)Assignment and Assumption.  The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500; provided, however, that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment.  The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

(v)No Assignment to Borrower.  No such assignment shall be made to the Parent or any of the Parent’s Affiliates or Subsidiaries without the consent of the Required Lenders.

(vi)No Assignment to Natural Persons.  No such assignment shall be made to a natural person.

Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits and subject to the obligations of Sections 3.01, 3.04, 3.05, and 11.04 with respect to facts and circumstances occurring prior to the effective date of such assignment.  Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender.  Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.

(c)Register.  The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and principal amounts of the Loans owing to each Lender pursuant to the terms hereof from time to time (the “Register”).  The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(d)Participations.  Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or, without the consent of the Required Lenders, the Parent or any of the Parent’s Affiliates or Subsidiaries) (each, a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of the Loans owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent, the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement.

Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any  provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 11.01 that affects such Participant.  Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.01, 3.04 and 3.05to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section (other than Unmatured Surviving Obligations).  To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 11.08as though it were a Lender, provided such Participant agrees to be subject to Section 2.10 as though it were a Lender.

(e)Limitations upon Participant Rights.  A Participant shall not be entitled to receive any greater payment under Section 3.01 or 3.04than the applicable 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 would be a Foreign Lender if it were a Lender 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 comply with Section 3.01(e) as though it were a Lender.  A Participant that would not be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.01, unless such Participant complies with Section 3.01(e) as though it were a Lender.

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

11.07  Treatment of Certain Information; Confidentiality.  Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, trustees, advisors and representatives (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 purporting to have jurisdiction over it (including any self-regulatory authority, such as the NAIC), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process; provided that the Person who is required to make such disclosure pursuant to a subpoena or similar legal process shall, to the extent reasonably practical, provide notice thereof to the Loan Parties and an opportunity to challenge such subpoena or legal process, as applicable; provided, further, that such Person shall not be liable for failure to provide such notice, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (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 actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section, (y) becomes available to the Administrative Agent, any Lender or any of their respective Affiliates on a nonconfidential basis from a source other than the Parent and its Subsidiaries, unless the Administrative Agent, any Lender or any of their respective Affiliates obtains such information with knowledge that the source is violating a confidentiality agreement with the Parent and its Subsidiaries.

For purposes of this Section, “Information” means all information received from the Borrower or any Subsidiary relating to the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is deemed confidential unless marked non-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.

Each of the Administrative Agent and the Lenders acknowledges that (a) the Information may include material non-public information concerning the Parent or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with applicable Law, including United States Federal and state securities Laws.

11.08  Right of Setoff.  If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of the Borrower or any other Loan Party against any and all of the obligations of the Borrower or such Loan Party now or hereafter existing under this Agreement or any other Loan Document to such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borroweror such Loan Party may be contingent or unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such indebtedness.  The rights of each Lender and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender or its respective Affiliates may have.  Each Lender agrees to notify the Borrower and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.

11.09  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 Administrative Agent or any 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 Administrative Agent or a Lender exceeds the Maximum Rate, such Person 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 hereunder.

11.10  Counterparts; Integration; Effectiveness.  This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof.  Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto.  Delivery of an executed counterpart of a signature page of this Agreement by telecopy or other electronic imaging means shall be effective as delivery of a manually executed counterpart of this Agreement.

11.11  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 Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Loan, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied.

11.12  Severability.  If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions.  The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

11.13  Replacement of Lenders.  If (i) any Lender requests compensation under Section 3.04; (ii) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01; (iii) any Lender delivers notice pursuant to Section 3.02; or (iv) pursuant to the provisions of Section 11.01, the agreement of any Lender is required for any amendment, waiver or consent and the Required Lenders have agreed to such amendment, waiver or consent, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 11.06), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:

(a)the Borrower shall have paid or caused to be paid to the Administrative Agent the assignment fee specified in Section 11.06(b);

(b)such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 3.05) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);

(c)in the case of any such assignment resulting from a claim for compensation under Section 3.04 or payments required to be made pursuant to Section 3.01, such assignment will result in a reduction in such compensation or payments thereafter; and

(d)such assignment does not conflict with applicable Laws.

A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

11.14  Governing Law; Jurisdiction; Etc.

(a)GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK

(b)SUBMISSION TO JURISDICTION.  EACH LOAN PARTY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT.  EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.  NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT OR ANY LENDER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST THE ANY LOAN PARTY OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.

(c)WAIVER OF VENUE.  EACH LOAN PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (b) OF THIS SECTION.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.

(d)SERVICE OF PROCESS.  EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 11.02.  NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

11.15  Waiver of Jury Trial.  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

11.16  California Proceedings.  If any action or proceeding is filed in a court of the State of California by or against any party hereto in connection with any of the transactions contemplated by this Agreement or any other Loan Document, (a) the court shall, and is hereby directed to, make a general reference pursuant to California Code of Civil Procedure Section 638 to a referee (who shall be a single active or retired judge) to hear and determine all of the issues in such action or proceeding (whether of fact or of law) and to report a statement of decision, provided that at the option of any party to such proceeding, any such issues pertaining to a “provisional remedy” as defined in California Code of Civil Procedure Section 1281.8 shall be heard and determined by the court, and (b) without limiting the generality of Section 11.04, the Borrower shall be solely responsible to pay all fees and expenses of any referee appointed in such action or proceeding

11.17  No Advisory or Fiduciary Responsibility.  In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document), each Loan Party acknowledges and agrees that: (i) (A) the arranging and other services regarding this Agreement provided by the Administrative Agent and the Arranger, are arm’s-length commercial transactions between each Loan Party and its respective Affiliates, on the one hand, and the Administrative Agent and the Arranger, on the other hand, (B)each Loan Party has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) each Loan Party is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents; (ii) (A) the Administrative Agent and the Arranger each is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for any Loan Party or any of its respective Affiliates, or any other Person and (B) neither the Administrative Agent nor the Arranger has any obligation to any Loan Party or any of its respective Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; and (iii) the Administrative Agent and the Arranger and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of any Loan Party or any of its respective Affiliates, and neither the Administrative Agent nor the Arranger  has any obligation to disclose any of such interests to any Loan Party or any of its respective Affiliates.  To the fullest extent permitted by law, each Loan Party hereby waives and releases any claims that it may have against the Administrative Agent and the Arranger with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated hereby.

11.18  Electronic Execution of Assignments and Certain Other Documents.  The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption or in any amendment or other modification hereof (including waivers and consents) shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.

11.19  USA PATRIOT Act.  Each Lender that is subject to the Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies each Loan Party that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies each Loan Party, which information includes the name and address of such Loan Party and other information that will allow such Lender or the Administrative Agent, as applicable, to identify such Loan Party in accordance with the Act.  Each Loan Party shall, promptly following a request by the Administrative Agent or any Lender, provide all documentation and other information that the Administrative Agent or such Lender requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Act.

11.20  Time of the Essence.  Time is of the essence of the Loan Documents.

11.21  Entire Agreement.  This Agreement and the other Loan Documents represent the final agreement among 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 among the parties.

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

MERCURY CASUALTY COMPANY

By:   /s/ THEODORE STALICK                         

Name:  Theodore R. Stalick                                 

Title: Vice President and Chief Financial Officer

MERCURY GENERAL CORPORATION

By:   /s/ THEODORE STALICK                         

Name:  Theodore R. Stalick                                 

Title: Vice President and Chief Financial Officer

BANK OF AMERICA, N.A., as

Administrative Agent

By:   /s/ KIP DAVIS                                   

Name:  Kipling Davis                                  

Title: Senior Vice President                         

BANK OF AMERICA, N.A., as a Lender

By:   /s/ KIP DAVIS                                   

Name:  Kipling Davis                                  

Title: Senior Vice President                         

EX-10.35

AMENDMENT AGREEMENT

THIS AMENDMENT AGREEMENT, dated as of January 26, 2009 (this “Amendment”), among MERCURY CASUALTY COMPANY (the “Borrower”), MERCURY GENERAL CORPORATION (the “Guarantor”), the various financial institutions parties thereto (collectively, the “Lenders”) and BANK OF AMERICA, N.A., as administrative agent (the “Administrative Agent”).  Terms defined in the Credit Agreement (as defined below) are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein.

WHEREAS, the Borrower, the Guarantor, the Lenders and the Administrative Agent are parties to that certain Credit Agreement dated as January 2, 2009 (the "Credit Agreement");

WHEREAS, in connection therewith, the Borrower and the Administrative Agent entered into that certain Security Agreement dated as of January 2, 2009 (the "Security Agreement"); and

WHEREAS, the Borrower and Bank of America, N.A. are entering into a certain Swap Contract and in the future may enter into additional Swap Contracts with respect to interest under the Credit Agreement and in connection therewith the Borrower has agreed that the obligations under such Swap Contracts shall be secured pursuant to the Security Agreement and the Guarantor has agreed that the Borrower's obligations under such Swap Contracts shall be guaranteed pursuant to Article X of the Credit Agreement;

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows:

SECTION 1.AMENDMENTS TO LOAN DOCUMENTS.  Effective as of the Amendment Effective Date (as hereinafter defined):

1.1Amendment to Section 1.01.  Section 1.01 of the Credit Agreement is amended as follows:

(a)  The definition of “Investments” is amended by adding the following at the end thereof:

“Investment as used in this Agreement does not include Swap Contracts.”

(b)  The following definitions are added in proper alphabetical order:

"Credit Agreement Swap Contract" means (i) the Swap Agreement and the Confirmation relating to a trade in connection with this Agreement between the Borrower and Bank of America to be dated on or around January 26, 2009, and (ii) any other Swap Contract entered into between the Borrower and any Person who at the time such Swap Contract was entered into was a Lender (or an Affiliate of any Lender) with respect to this Agreement and designated by the Borrower as a Credit Agreement Swap Contact.

"Existing Loan Agreement Swap Contract" means (i) the ISDA Master Agreement dated as of February 15, 2008 (the "Master Agreement"), the ISDA Schedule to the Master Agreement dated as of February 15, 2008 (the "Schedule"), the Amendment to the ISDA Master Agreement dated as of January 26, 2009 amending the Master Agreement and the Schedule (the "ISDA Amendment and, together with the Master Agreement and the Schedule, the "Swap Agreement") and the Confirmation dated as of February 29, 2008, each between the Borrower and Bank of America, and (ii) any other Swap Contract entered into between the Borrower and Bank of America (or an Affiliate of Bank of America) with respect to the Existing Term Loan Agreement and designated by the Borrower as a Loan Agreement Swap Contact.

1.2Amendment to Section 7.01(b).  Section 7.01(b) of the Credit Agreement is amended in its entirety to read as follows:

"Liens securing the Existing Term Loan Agreement provided that the outstanding principal amount thereof does not exceed $18,000,000 or any additional amount permitted pursuant to Section 7.03(b) and Liens securing any Existing Loan Agreement Swap Contract;"

1.3Amendment to Section 7.01.  Section 7.01 of the Credit Agreement is amended by (i) deleting the and at the end of clause (h) thereof; (ii) deleting the “.” appearing at the end of clause (i) thereof and replacing it with “; and”; and (iii) inserting the following new clause (j) at the end thereof:

"(j)           Liens on assets other than the Collateral and any Equity Interest in any Subsidiary of the Borrower securing the Indebtedness permitted pursuant to Section 7.03(c)."

1.4Amendment to Section 7.09.  Section 7.09 of the Credit Agreement is amended by adding the following at the end of the parenthetical "or any Credit Agreement Swap Contract or any Existing Loan Agreement Swap Contract".

1.5Amendment to Section 8.03.  Paragraphs "Fourth" and "Last" of Section 8.03 of the Credit Agreement are amended in their entirety to read as follows

Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans and amounts due under the Credit Agreement Swap Contracts, ratably among the Lenders and the swap counterparties under the Credit Agreement Swap Contracts, in proportion to the respective amounts described in this clause Fourth held by them;

Last, the balance, if any, after all of the Obligations (other than Unmatured Surviving Obligations) and all amounts due under the Credit Agreement Swap Contracts have been indefeasibly paid in full, to the Borrower or as otherwise required by Law.

1.6Amendment to Section 10.01.  The first sentence of Section 10.01 of the Credit Agreement is amended in its entirety to read as follows:

For valuable consideration, receipt whereof is hereby acknowledged, and to induce each Lender to make Loans to the Borrower and to induce the Administrative Agent to act hereunder, the Parent hereby unconditionally and irrevocably guarantees to each Lender and the Administrative Agent the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of (i) all Obligations of the Borrower and (ii) all liability of the Borrower under the Credit Agreement Swap Contracts, in each case whether for principal, interest, fees, expenses, indemnification or otherwise, whether direct or indirect, absolute or contingent or now existing or hereafter arising (collectively the "Guaranteed Obligations").  For purposes of this Article X, (i) the term "Lender" means the Lenders and the counterparty to the Credit Agreement Swap Contracts, (ii) the term "Agreement" means this Agreement and the 2009 Credit Agreement Swap Contracts, and (iii) the term "Loan Documents" means the Loan Documents and the Credit Agreement Swap Contracts.

1.7Amendment to Security Agreement.  The following definitions in Section 1 of the Security Agreement are amended in their entirety as follows:

“Lender” means each Lender under the Credit Agreement and the Lenders or Affiliates of the Lenders that are counterparties to the Credit Agreement Swap Contracts.

"Liabilities" means all Obligations (monetary or otherwise) of the Pledgor and all liabilities and obligations of the Pledgor arising under the Credit Agreement Swap Contracts, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising and including interest, fees and other amounts that accrue after the commencement by or against the Pledgor or the Guarantor of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such amounts are allowed claims in such proceeding.

SECTION 2.CONDITIONS PRECEDENT.  This Amendment shall become effective on the date (the “Amendment Effective Date”) when the Administrative Agent shall have received this Amendment, duly executed by the Borrower, the Guarantor, the Administrative Agent and the Required Lenders.

SECTION 3.REPRESENTATIONS AND WARRANTIES.  To induce the Lenders and the Administrative Agent to enter into this Amendment, each of the Borrower and the Guarantor hereby represents and warrants to the Administrative Agent and each Lender as follows:

3.1           Due Authorization, Non-Contravention, etc.  The execution, delivery and performance by each of the Borrower and the Guarantor of this Amendment 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 such Person’s Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien (other than as contemplated herein)  under, or require any payment to be made under (i) any Contractual Obligation to which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries, which could reasonably be expected to have a Material Adverse Effect, or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any Law.

3.2           Government Approval, Regulation, etc.  No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower or the Guarantor of this Amendment; except for approvals, consents, exemptions, authorizations, actions, notices or filings (i) which have already been obtained or made or (ii) for which the failure to obtain or make could not reasonably be expected to have a Material Adverse Effect and such failure could be cured without unreasonable delay or cost.

3.3           Validity, etc.  This Amendment has been duly executed and delivered by the Borrower and the Guarantor.  This Amendment constitutes a legal, valid and binding obligation of such Person, enforceable against each Person in accordance with its terms.

SECTION 4.MISCELLANEOUS.

4.1Continuing Effectiveness, etc.  This Amendment shall be deemed to be an amendment to the Credit Agreement and the Security Agreement, and each of the Credit Agreement and Security Agreement, as amended hereby, shall remain in full force and effect and each is hereby ratified, approved and confirmed in each and every respect.  After the effectiveness of this Amendment in accordance with its terms, all references to the Credit Agreement or the Security Agreement in the Loan Documents or in any other document, instrument, agreement or writing shall be deemed to refer to the Credit Agreement or the Security Agreement, as the case may be, as amended hereby.

4.2Payment of Costs and Expenses.  The Borrower agrees to pay on demand all reasonable out-of-pocket expenses of the Administrative Agent (including the reasonable fees and out-of-pocket expenses of counsel to the Administrative Agent) in connection with the negotiation, preparation, execution and delivery of this Amendment.

4.3Severability.  Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction.

4.4Headings.  The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof.

4.5Execution in Counterparts.  This Amendment may be executed by the parties hereto in several counterparts (and by different parties hereto in different counterparts), each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement.

4.6Governing Law.  THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK.

4.7Successors and Assigns.  Subject to any restrictions on assignment contained in the Credit Agreement, this Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

IN WITNESS WHEREOF, the undersigned have duly executed this Amendment Agreement as of the date first set forth above.

MERCURY CASUALTY COMPANY

By:   /s/ THEODORE STALICK                         

Name:  Theodore R. Stalick                                 

Title: Vice President and Chief Financial Officer

MERCURY GENERAL CORPORATION

By:   /s/ THEODORE STALICK                         

Name:  Theodore R. Stalick                                 

Title: Vice President and Chief Financial Officer

BANK OF AMERICA, N.A., individually as Administrative Agent and Lender

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF THE COMPANY

Name of the Entity	State of Incorporation
Mercury Casualty Company	California
Mercury Insurance Company	California
Mercury Insurance Company of Illinois	Illinois
Mercury National Insurance Company	Illinois
Mercury Insurance Company of Georgia	Georgia
Mercury Indemnity Company of Georgia	Georgia
Mercury Insurance Company of Florida	Florida
Mercury Indemnity Company of America	Florida
California Automobile Insurance Company	California
California General Underwriters Insurance Company, Inc.	California
Concord Insurance Services, Inc.	Texas
Mercury Insurance Services, LLC	California
Mercury County Mutual Insurance Company*	Texas
American Mercury Insurance Company	Oklahoma
American Mercury Lloyds Insurance Company*	Texas
Mercury Select Management Company, Inc.	Texas
American Mercury MGA, Inc.	Texas
Mercury Group Inc.	Florida
Auto Insurance Specialists, LLC	California
AIS Management, LLC	California
PoliSeek AIS Insurance Solutions, Inc.	Illinois

*Controlled by Mercury General Corporation

EX-23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Mercury General Corporation:

We consent to the incorporation by reference in the registration statements (No. 333-62228) on Form S-3 and (Nos. 333-01583 and 333-125460) on Form S-8 of Mercury General Corporation of our reports dated February 27, 2009, with respect to the consolidated balance sheets of Mercury General Corporation as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, comprehensive (loss) income, and cash flows for each of the years in the three-year period ended December 31, 2008, and all related financial statement schedules, and the effectiveness of internal control over financial reporting as of December 31, 2008, which reports appear in the December 31, 2008 annual report on Form 10-K of Mercury General Corporation.

Our report on the consolidated financial statements refers to the Company’s adoption of the provisions of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, as of January 1, 2008.

           &# 160;/s/ KPMG LLP

Los Angeles, California

February 27, 2009

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Gabriel Tirador, certify that:

1. I have reviewed this annual report on Form 10-K of Mercury General Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 27, 2009	/s/ GABRIEL TIRADOR
	Gabriel Tirador, Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Theodore Stalick, certify that:

1. I have reviewed this annual report on Form 10-K of Mercury General Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 27, 2009	/s/ THEODORE STALICK
	Theodore Stalick, Vice President and
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

Certification of Chief Executive Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. §1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Mercury General Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the accompanying Annual Report on Form 10-K of the Company for the period ended December 31, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 27, 2009	/s/ GABRIEL TIRADOR
	Gabriel Tirador, Chief Executive Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.2

EXHIBIT 32.2

Certification of Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. §1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Mercury General Corporation (the “Company”) hereby certifies, tosuch officer’s knowledge, that:

(i) the accompanying Annual Report on Form 10-K of the Company for the period ended December 31, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 27, 2009	/s/ THEODORE STALICK
	Theodore Stalick, Vice President and
	Chief Financial Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.