<PAGE>
 
                                 AMENDMENT AND
                                 -------------
                                  RESTATEMENT
                                  -----------
                                       OF
                                       --
                                CREDIT AGREEMENT
                                ----------------

     AMENDMENT AND RESTATEMENT (this "Amendment"), dated as of December 31,
                                      ---------                            
1998, of the CREDIT AGREEMENT, dated as of November 21, 1996, by and among
MERCURY GENERAL CORPORATION, a California corporation (the "Borrower"), the
lenders party thereto (collectively, together with their respective assigns, the
"Lenders", and each a "Lender") and THE BANK OF NEW YORK, as agent for the
Lenders (in such capacity, the "Agent"), as amended by Amendment No. 1, dated as
of February 20, 1998, Amendment No. 2, dated as of July 14, 1998 and Amendment
No. 3, dated as of October 30, 1998 (the "Agreement").
                                          ---------   

                                    RECITALS
                                    --------
                                        
     1.     Except as otherwise provided herein, capitalized terms used herein
that are not herein defined shall have the meanings ascribed thereto by the
Agreement.

     2.     The parties to the Agreement desire to amend and restate the
Agreement to the extent set forth herein upon the terms and conditions herein
contained.

     Therefore, in consideration of the RECITALS and the terms and conditions
herein contained, and of other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, it is agreed that the Agreement be
and the same hereby is amended and restated in its entirety so as to read as
presently set forth therein with the exception that the definition of "Maturity
Date" set forth in Section 1.1 thereof shall read as follows:

            "Maturity Date": November 21, 2001 (or any date subsequent thereto
            resulting from an extension of the Maturity Date pursuant to Section
            2.17), or such earlier date on which the Notes shall become due and
            payable, whether by acceleration or otherwise.

     A.     This Amendment shall not be effective until such time (the
"Restatement Effective Date") as each of the following conditions precedent has
---------------------------                                                    
been fulfilled:
<PAGE>
 
          1.   This Amendment.
               -------------- 

               The Agent shall have received counterparts of this Amendment
executed by a duly authorized officer of the Borrower and the Agent and
consented to by all of the Lenders.

          2.   Fees and Expenses of Special Counsel.
               ------------------------------------ 

               The fees and expenses of Special Counsel in connection with the
preparation, negotiation and closing of this Amendment shall have been paid.


          3.   Compliance.
               ---------- 

               After giving effect to this Amendment, (a) the Borrower shall be
in compliance with all of the terms, covenants and conditions of the Loan
Documents as amended hereby, (b) there shall exist no Default or Event of
Default and (c) the representations and warranties contained in the Loan
Documents shall be true and correct with the same effect as though such
representations and warranties had been made on the Restatement Effective Date.

     B.   The Borrower hereby reaffirms and admits the validity and
enforceability of the Loan Documents and all of its obligations thereunder,
agrees and admits that it has no defenses to or offsets against any of its
obligations under the Loan Documents, and represents and warrants that there
exists no Default or Event of Default and that the representations and
warranties contained in the Loan Documents are true and correct on and as of the
date hereof.

     C.   In all other respects the Loan Documents shall remain in full force
and effect, and no amendment of any term or condition of the Agreement herein
contained shall be deemed to be an amendment of any other term or condition
contained in the Agreement or any other Loan Document or constitute a waiver of
any Default or Event of Default.

     D.   This Amendment may be executed in any number of counterparts all of
which, taken together, shall constitute one Amendment. In making proof of this
Amendment, it shall only be necessary to produce the counterpart executed and
delivered by the party to be charged.

     E.   THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED
TO BE PERFORMED IN, THE STATE OF NEW YORK AND SHALL 
<PAGE>
 
BE CONSTRUED AND ENFORCEABLE IN ACCORDANCE WITH, AND BE GOVERNED BY, THE
INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT
OF LAWS.

     The Borrower and the Agent have caused this Amendment to be duly executed
as of the date first above written.
<PAGE>
 
                                    MERCURY GENERAL CORPORATION
    
                                    By:
                                       ------------------------------------
                                    Name:
                                          ---------------------------------
                                    Title:
                                           --------------------------------
<PAGE>
 
                                    THE BANK OF NEW YORK, individually  
                                    and as Agent                        
                                                                        
                                    By:                                 
                                        -----------------------------------
                                    Name:                               
                                          ---------------------------------
                                    Title:                              
                                           --------------------------------
<PAGE>
 
CONSENTED TO:

UNION BANK OF CALIFORNIA, N.A.

By:
    ---------------------------
Name:
      -------------------------
Title:
       ------------------------
<PAGE>
 
THE FIRST NATIONAL BANK OF CHICAGO

By:
    ----------------------------
Name:
      --------------------------
Title:
        ------------------------