<PAGE>
 
                               AMENDMENT 1998-1

                          MERCURY GENERAL CORPORATION
                              PROFIT SHARING PLAN



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

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

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

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

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

                                       1
<PAGE>
 
  WHEREAS,the Company wishes to amend the provisions of Section 3.10 of the Plan
to provide greater flexibility to the Committee in selecting Investment Funds;

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

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

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

                                       2
<PAGE>
 
such a collective bargaining agreement, and Employees who are nonresident aliens
and receive no United States source income."
 
  2.  The definition of "ESOP Allocation Period" in Section 1.2 of the Plan is
amended, effective January 1, 1998, to read as follows:

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

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

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

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

                                       3
<PAGE>
 
    "As of each Anniversary Date, there shall be allocated from the Company
contribution under Section 3.1(a) for the Plan Year and any amount credited to a
former Employee's Company Contribution Account as of the preceding Anniversary
Date which has been forfeited (as set forth in Section 6.2), to the Company
Contribution Account of each Participant who completed at least 1000 Hours of
Service during the Plan Year and who is a Participant on the Anniversary Date,
an amount equal to that portion of the total allocable amount that the
Participant's Compensation bears to the total Compensation of all such
Participants."

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

    "3.10 - Investment Funds.
            ---------------- 

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

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

                                       4
<PAGE>
 
established by the Committee or pursuant to such other methods approved by the
Committee (including telephonic transfers if authorized by the Committee). The
Committee shall describe to the Participants the investments to be made under
each Investment Fund in such detail as the Committee deems appropriate in its
sole discretion. If a Participant does not make an election with respect to the
investment of his Accounts, they will be invested in the fund selected by the
Committee as announced to Participants. The Committee may establish other rules,
regulations, and procedures regarding the Investment Funds as it deems
appropriate in its sole discretion."

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

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

                                       5
<PAGE>
 
allocable amount that the Participant's Compensation during the ESOP Allocation
Period bears to the total Compensation of all such Participants during the ESOP
Allocation Period."

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


                                    MERCURY GENERAL CORPORATION



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

                                       6