----

----

|   | 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) |   |

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

T No £

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

----

----

----

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

|              |   | 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 | % |   |   |   |   |

----

| 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 |

----

----

|                                   |   | 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 |   |

----

|                                     |   | 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 | ) |   |   |   |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                        |   | 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 | % |

----

|                |   | 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 | % |

|                        |   | 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 |   |

----

|   | •      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 bySAP. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | •      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 bySAP. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | •      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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                      |   | 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 |   |

----

|                                              |   | 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 | ) |

----

|   | Competitive      Conditions |
|--------|-----------------------------|

----

| 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                      |

----

----

----

| 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 andSecretary |

----

| Item      1A. | Risk      Factors |
|---------------|-------------------|

----

|   | •      availability of sufficient reliabledata; |
|--------|-------------------------------------------------------|

|   | •       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 pricingstrategies; |
|--------|-------------------------------------------------------------------|

|   | • 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 faithclaims; |
|--------|-----------------------------------------------------------------------------|

|   | • weather      catastrophes; |
|--------|-----------------------------------------|

|   | • unexpected      medical inflation; and |
|--------|-----------------------------------------------------|

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

----

|   | • 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. |
|--------|-------------------------------------------------------------------------------------------------------------------------|

|   | • 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 amortizationexpense. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

deferred tax 
asset through a charge to earnings in the period in which thedetermination is made. This charge could have a material 
adverse 
affect on the Company’s resultsof operations and financial condition. In addition, the assumptions used to makethis determination are subject to change from period to period based on changesin tax laws or variances between the Company’s future projected operatingperformance and actual results. As a result, significant management judgment isrequired in assessing the possible need for a deferred tax asset valuationallowance. For these reasons and because changes in these assumptions andestimates can materially affect the Company’s results of operations andfinancial condition, management has included the assessment of a deferred taxasset valuation allowance as a critical accounting estimate.

|   | • earthquake,      fire, flood and other naturaldisasters; |
|--------|-----------------------------------------------------------------------|

|   | • terrorist      attacks and attacks by computer viruses or  hackers; |
|--------|----------------------------------------------------------------------------------|

|   | • power      loss; |
|--------|-------------------------------|

|   | • unauthorized      access; and |
|--------|--------------------------------------------|

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

----

----

----

----

----

|   | • 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 policyfees; |
|--------|--------------------------------------------------------------------|

|   | • limitations      on types and amounts ofinvestments; |
|--------|-------------------------------------------------------------------|

|   | • 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 financialcondition; |
|--------|-----------------------------------------------------------------|

|   | • 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. |
|--------|--------------------------------------------------------------------------------------------|

----

----

| Item 1B. | Unresolved      Staff Comments |
|----------|--------------------------------|

----

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

| 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 | %      * |

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

| Item      4. | Submission      of Matters to a Vote of SecurityHolders |
|--------------|---------------------------------------------------------|

----

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

| 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 |   |

----

|                             |   | 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 |   |

----

| 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 |   |

----

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

|   | •      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. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | •      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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | • 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|   | •      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 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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | •      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. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 1.    Inflation Variability –      California automobile lines ofbusiness |
|--------|-----------------------------------------------------------------------------------------------------|

|                                                               | %      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 | % |

----

| 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                          | )      |

----

|   | 2.    Claims reported      variability (Claim CountDevelopment) |
|--------|-------------------------------------------------------------------------------------|

| 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 | % |

| 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                                                 | )      |

----

|   | 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. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 establishreserves. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (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 reserveestimates. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                              |   | 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 |   |

----

|                                                    |   | 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 |   |

----

|                                         |   | 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 |   |

----

----

|                                          |   | 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 |   |

----

|                                                   |   | 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 |   |

----

----

|                                     |   | 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 | % |

----

|                        |   | 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 |   |

----

----

|                         |   | 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 |   |

----

----

|                                     |   | 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 |   |

----

| Item      7A. | Quantitative      and Qualitative Disclosures about MarketRisks |
|---------------|-----------------------------------------------------------------|

----

its primary activities, as the Company investssubstantial funds in interest sensitive assets and issues interest sensitiveliabilities.  Interest rate risk includes risks related to changes inU.S. Treasury yields and other key benchmarks as well as changes in interestrates resulting from the widening credit spreads and credit exposure tocollateralized securities.

----

Credit risk is riskdue to uncertainty in a counterparty’s ability to meet itsobligations.  Credit risk is managed by maintaining a minimum averagefixed maturities portfolio credit quality rating of AA, unchanged from December31, 2007.  Historically, the ten-year default rate per Moody’s forAA-rated municipal bonds has been less than 1%.  The Company’s bondholdings are broadly diversified geographically, within the tax-exemptsector,  representing approximately 88% of fixed maturity securitiesat December 31, 2008 at fair value.  Remaining fixed maturitysecurities in the taxable sector consist principally of investment grade issues,of which approximately 59% represents U.S. government bonds and agencies, whichwere rated at AAA at December 31, 2008.  The Company believes that itsconservative approach to credit risk has served it well in the current economicclimate, allowing for a competitive advantage over many insurers exposed to suchrisk.

----

----

|                                                 |   | 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 |   |

----

| Item      8. | Financial      Statements and Supplementary Data |
|--------------|--------------------------------------------------|

|                                                                                                            |   | Page   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Reports      of Independent Registered Public Accounting Firm                                                   |   |   | 69     |   |
| Consolidated      Financial Statements:                                                                         |   |   |   |   |
| Consolidated      Balance Sheets as of December 31, 2008 and 2007                                               |   |   | 71     |   |
| Consolidated      Statements of Operations for Each of the Years in the Three-Year      Period                  |   |   |   |   |
| Ended      December 31, 2008                                                                                    |   |   | 72     |   |
| Consolidated      Statements of Comprehensive (Loss) Income for Each of the Years in the      Three-Year Period |   |
| Ended      December 31, 2008                                                                                    |   |   | 73     |   |
| Consolidated      Statements of Shareholders' Equity for Each of the Years in the Three-Year      Period        |   |   |   |   |
| Ended      December 31, 2008                                                                                    |   |   | 74     |   |
| Consolidated      Statements of Cash Flows for Each of the Years in the Three-Year      Period                  |   |   |   |   |
| Ended      December 31, 2008                                                                                    |   |   | 75     |   |
| Notes      to Consolidated Financial Statements                                                                 |   |   | 76     |   |

----

----

----

| ASSETS                                                                                           |   |  2008 |      |   |  2007 |   |
|--------------------------------------------------------------------------------------------------|--------|------------|-----------|--------|------------|--------|
|                                                                                             |   |       |      |   |       |   |
| 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 |   |

----

|                                        |   | 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 |   |

----

|                                                                             |   | 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 |   |

----

|                                                                      |   | 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 |   |

----

|                                                                                            |   | 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 |   |

----

----

----

----

|   | •      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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

|   | •      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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | •      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 ofdetermination. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                              |   | 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 |   |

----

----

----

|                                            |   | 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 |   |

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

----

|                                                                          |   | 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 |   |

----

|                                       |   | 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 | ) |

----

|                                                                             |   | 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 |   |

|                                       |   | 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  |   |

----

----

----

|                                       |   | 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 |   |

----

|                                                                |   | 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 | ) |

----

|                                    |   | 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 |   |

|                                       |   | 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 |   |

----

|                                                   |   | 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 |   |

----

|                               |   | 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 |   |

|                                 |   | 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 |   |

----

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

----

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

----

|     |   | 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 |   |

|                                                     |   | 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 |   |

----

|                                                                               |   | 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 | ) |

----

|                                                                                 |   | (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  |   |

----

|                                                          |   | 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 |   |

----

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

|                                                      |   | 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 |   |

----

|                      |   | 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 |   |

----

|                                                  |   | 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 |   |

|                                  |   | 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 |   |

----

|                          |                |   | 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 |   |

|                                |   | 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 |   |

----

|       |   | 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    |   |

----

----

|                                                    |   | 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 |   |

----

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

----

| Item      9A. | Controls      and Procedures |
|---------------|------------------------------|

There has been nochange in the Company’s internal control over financial reporting during theCompany’s most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting. The Company’s process for evaluating controls andprocedures is continuous and encompasses constant improvement of the design andeffectiveness of established controls and procedures and the remediation of anydeficiencies which may be identified during this process.

| Item      9B. | Other      Information |
|---------------|------------------------|

----

| Item      10. | Directors      and Executive Officers of theRegistrant |
|---------------|--------------------------------------------------------|

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

| Item      12. | Security      Ownership of Certain Beneficial Owners and Management and Related      Stockholder Matters |
|---------------|----------------------------------------------------------------------------------------------------------|

| Item      13. | Certain      Relationships and RelatedTransactions |
|---------------|----------------------------------------------------|

| Item      14. | Principal      Accounting Fees and Services |
|---------------|---------------------------------------------|

----

| Item      15. | Exhibits,      Financial Statement Schedules |
|---------------|----------------------------------------------|

|   | 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 page68. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2.    Financial      Statement Schedules: |
|--------|---------------------------------------------------------------|

|   | 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 theCompany.                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 3.4   | (4)        | Second      Amendment to Amended and Restated Bylaws of theCompany.                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 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 | (24)*      | Amendment      2008-1 to the Mercury General Corporation Profit Sharing    Plan.                                                                                                                                                                                                                                                                                                                                                                                      |
|   | 10.18 | (24)*      | 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 | (24)*      | 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 |  (24) | 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 |  (24) | 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  |  (24) | 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 theCompany.  |

|   | (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 thisreference. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (24)This      document was filed as an exhibit to Registrant’s Form 10-K for the fiscal      year ended December 31, 2008, and is incorporated herein by this      reference. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | MERCURY      GENERAL CORPORATION           |
|--------|--------------------------------------------|
|   |                                       |
| BY     | /s/      GABRIEL TIRADOR                   |
|   | Gabriel      Tirador                       |
|   | President      and Chief Executive Officer |

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| 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 |   |

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| 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 |   |

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|                                                                                            |   | 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 |   |

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|                                                                               |   | 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 |   |

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|                                                              |   | 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 |   |

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| 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.                                     |

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|   |   | 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 |   |

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