SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Quarter Ended June 30, 2009

Commission File No. 001-12257





MERCURY GENERAL CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 95-2211612                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



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

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





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).   Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |   |  | 
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | - |  | 
|Large accelerated filer |  | x                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

At July 31, 2009, the Registrant had issued and outstanding an aggregate of 54,769,713 shares of its Common Stock.









---

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

MERCURY GENERAL
CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                      |  |              |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                      |  | June 30,2009 |           |   | December 31,2008 |  
|ASSETS                                                                                                |  |              |           |   |                  |   |           |  
|Investments:                                                                                          |  |              |           |   |                  |   |           |  
|Fixed maturities trading, at fair value (amortized cost $2,724,175; $2,728,471)                       |  | $            | 2,624,812 |   |                  | $ | 2,481,673 |  
|Equity securities trading, at fair value (cost $348,285; $403,773)                                    |  |              | 258,813   |   |                  |   | 247,391   |  
|Short-term investments, at fair value (cost $94,574; $208,278)                                        |  |              | 94,557    |   |                  |   | 204,756   |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|Total investments                                                                                     |  |              | 2,978,182 |   |                  |   | 2,933,820 |  
|Cash                                                                                                  |  |              | 194,710   |   |                  |   | 35,396    |  
|Receivables:                                                                                          |  |              |           |   |                  |   |           |  
|Premiums receivable                                                                                   |  |              | 256,004   |   |                  |   | 268,227   |  
|Premium notes                                                                                         |  |              | 27,410    |   |                  |   | 25,699    |  
|Accrued investment income                                                                             |  |              | 36,634    |   |                  |   | 36,540    |  
|Other                                                                                                 |  |              | 8,343     |   |                  |   | 9,526     |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|Total receivables                                                                                     |  |              | 328,391   |   |                  |   | 339,992   |  
|Deferred policy acquisition costs                                                                     |  |              | 181,132   |   |                  |   | 200,005   |  
|Fixed assets, net                                                                                     |  |              | 201,987   |   |                  |   | 191,777   |  
|Current income taxes                                                                                  |  |              |          |   |                  |   | 43,378    |  
|Deferred income taxes                                                                                 |  |              | 119,988   |   |                  |   | 171,025   |  
|Goodwill                                                                                              |  |              | 42,850    |   |                  |   | 5,206     |  
|Other intangible assets                                                                               |  |              | 70,229    |   |                  |   |          |  
|Other assets                                                                                          |  |              | 24,402    |   |                  |   | 29,596    |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|Total assets                                                                                          |  | $            | 4,141,871 |   |                  | $ | 3,950,195 |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|                                                                                                      |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                  |  |              |           |   |                  |   |           |  
|Losses and loss adjustment expenses                                                                   |  | $            | 1,070,003 |   |                  | $ | 1,133,508 |  
|Unearned premiums                                                                                     |  |              | 862,706   |   |                  |   | 879,651   |  
|Notes payable                                                                                         |  |              | 273,426   |   |                  |   | 158,625   |  
|Accounts payable and accrued expenses                                                                 |  |              | 118,766   |   |                  |   | 93,864    |  
|Current income taxes                                                                                  |  |              | 9,576     |   |                  |   |          |  
|Other liabilities                                                                                     |  |              | 164,848   |   |                  |   | 190,496   |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                     |  |              | 2,499,325 |   |                  |   | 2,456,144 |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|Commitments and contingencies                                                                         |  |              |           |   |                  |   |           |  
|Shareholders equity:                                                                                 |  |              |           |   |                  |   |           |  
|Common stock without par value or stated value:                                                       |  |              |           |   |                  |   |           |  
|Authorized 70,000,000 shares; issued and outstanding 54,769,713 in 2009 and 54,763,713 shares in 2008 |  |              | 72,030    |   |                  |   | 71,428    |  
|Accumulated other comprehensive loss                                                                  |  |              | (550      | ) |                  |   | (876      | )
|Retained earnings                                                                                     |  |              | 1,571,066 |   |                  |   | 1,423,499 |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                            |  |              | 1,642,546 |   |                  |   | 1,494,051 |  
|                                                                                                      |  |              |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                            |  | $            | 4,141,871 |   |                  | $ | 3,950,195 |  
|                                                                                                      |  |              |           |   |                  |   |           |  

See accompanying Notes to Consolidated Financial Statements.



2



---

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)



|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | ---- | - | -------
|                                                                                                                                                                                                                   |  | Three Months Ended June 30,
|                                                                                                                                                                                                                   |  | 2009                        |         | 2008
|Revenues:                                                                                                                                                                                                          |  |                             |         |      |   |        
|Net premiums earned                                                                                                                                                                                                |  | $                           | 659,211 |      | $ | 711,204
|Net investment income                                                                                                                                                                                              |  |                             | 36,212  |      |   | 38,995 
|Net realized investment gains                                                                                                                                                                                      |  |                             | 99,862  |      |   | 36,496 
|Other                                                                                                                                                                                                              |  |                             | 694     |      |   | 1,202  
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Total revenues                                                                                                                                                                                                     |  |                             | 795,979 |      |   | 787,897
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Expenses:                                                                                                                                                                                                          |  |                             |         |      |   |        
|Losses and loss adjustment expenses                                                                                                                                                                                |  |                             | 445,463 |      |   | 489,545
|Policy acquisition costs                                                                                                                                                                                           |  |                             | 136,359 |      |   | 157,441
|Other operating expenses                                                                                                                                                                                           |  |                             | 51,364  |      |   | 43,169 
|Interest                                                                                                                                                                                                           |  |                             | 1,879   |      |   | 1,486  
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Total expenses                                                                                                                                                                                                     |  |                             | 635,065 |      |   | 691,641
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Income before income taxes                                                                                                                                                                                         |  |                             | 160,914 |      |   | 96,256 
|Income tax expense                                                                                                                                                                                                 |  |                             | 46,467  |      |   | 25,530 
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Net income                                                                                                                                                                                                         |  | $                           | 114,447 |      | $ | 70,726 
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Basic earnings per share (weighted average shares outstanding 54,769,713 in 2009 and 54,733,880 in 2008)                                                                                                           |  | $                           | 2.09    |      | $ | 1.29   
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Diluted earnings per share (weighted average shares 55,319,836 as adjusted by 550,123 for the dilutive effect of options in 2009 and
54,997,272 as adjusted by 263,392 for the dilutive effect of options in 2008) |  | $                           | 2.07    |      | $ | 1.29   
|                                                                                                                                                                                                                   |  |                             |         |      |   |        
|Dividends declared per share                                                                                                                                                                                       |  | $                           | 0.58    |      | $ | 0.58   
|                                                                                                                                                                                                                   |  |                             |         |      |   |        

See accompanying Notes to Consolidated Financial Statements.



3



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MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)



|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | --------- | ---- | - | --------- | -
|                                                                                                                                                                                                                   |  | Six Months Ended June 30, |          
|                                                                                                                                                                                                                   |  | 2009                      |           | 2008 |  
|Revenues:                                                                                                                                                                                                          |  |                           |           |      |   |           |  
|Net premiums earned                                                                                                                                                                                                |  | $                         | 1,325,274 |      | $ | 1,432,120 |  
|Net investment income                                                                                                                                                                                              |  |                           | 74,126    |      |   | 78,294    |  
|Net realized investment gains (losses)                                                                                                                                                                             |  |                           | 181,176   |      |   | (55,641   | )
|Other                                                                                                                                                                                                              |  |                           | 2,361     |      |   | 2,496     |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Total revenues                                                                                                                                                                                                     |  |                           | 1,582,937 |      |   | 1,457,269 |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Expenses:                                                                                                                                                                                                          |  |                           |           |      |   |           |  
|Losses and loss adjustment expenses                                                                                                                                                                                |  |                           | 889,755   |      |   | 973,018   |  
|Policy acquisition costs                                                                                                                                                                                           |  |                           | 283,890   |      |   | 317,582   |  
|Other operating expenses                                                                                                                                                                                           |  |                           | 104,850   |      |   | 87,484    |  
|Interest                                                                                                                                                                                                           |  |                           | 3,425     |      |   | 1,996     |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Total expenses                                                                                                                                                                                                     |  |                           | 1,281,920 |      |   | 1,380,080 |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Income before income taxes                                                                                                                                                                                         |  |                           | 301,017   |      |   | 77,189    |  
|Income tax expense                                                                                                                                                                                                 |  |                           | 89,917    |      |   | 10,424    |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Net income                                                                                                                                                                                                         |  | $                         | 211,100   |      | $ | 66,765    |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Basic earnings per share (weighted average shares outstanding 54,768,520 in 2009 and 54,731,897 in 2008)                                                                                                           |  | $                         | 3.85      |      | $ | 1.22      |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Diluted earnings per share (weighted average shares 55,166,115 as adjusted by 397,595 for the dilutive effect of options in 2009 and
54,894,590 as adjusted by 162,693 for the dilutive effect of options in 2008) |  | $                         | 3.83      |      | $ | 1.22      |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  
|Dividends declared per share                                                                                                                                                                                       |  | $                         | 1.16      |      | $ | 1.16      |  
|                                                                                                                                                                                                                   |  |                           |           |      |   |           |  

See accompanying Notes to Consolidated Financial Statements.



4



---

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



|                                                          |  |                             |         |      |   |       
|--------------------------------------------------------- |  | --------------------------- | ------- | ---- | - | ------
|                                                          |  | Three Months Ended June 30,
|                                                          |  | 2009                        |         | 2008
|Net income                                                |  | $                           | 114,447 |      | $ | 70,726
|Other comprehensive income, before tax:                   |  |                             |         |      |   |       
|Gains on hedging instrument                               |  |                             | 490     |      |   | 713   
|                                                          |  |                             |         |      |   |       
|Other comprehensive income, before tax                    |  |                             | 490     |      |   | 713   
|                                                          |  |                            
|Income tax expense related to gains on hedging instrument |  |                             | 172     |      |   | 249   
|                                                          |  |                             |         |      |   |       
|Comprehensive income, net of tax                          |  | $                           | 114,765 |      | $ | 71,190
|                                                          |  |                             |         |      |   |       

See accompanying Notes to Consolidated Financial Statements.



5



---

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



|                                                          |  |                           |         |      |   |       
|--------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------
|                                                          |  | Six Months Ended June 30,
|                                                          |  | 2009                      |         | 2008
|Net income                                                |  | $                         | 211,100 |      | $ | 66,765
|Other comprehensive income, before tax:                   |  |                           |         |      |   |       
|Gains on hedging instrument                               |  |                           | 502     |      |   | 269   
|                                                          |  |                           |         |      |   |       
|Other comprehensive income, before tax                    |  |                           | 502     |      |   | 269   
|                                                          |  |                          
|Income tax expense related to gains on hedging instrument |  |                           | 176     |      |   | 94    
|                                                          |  |                           |         |      |   |       
|Comprehensive income, net of tax                          |  | $                         | 211,426 |      | $ | 66,940
|                                                          |  |                           |         |      |   |       

See accompanying Notes to Consolidated Financial Statements.



6



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MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                  |  |                           |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Six Months Ended June 30, |         
|                                                                                  |  | 2009                      |          |   | 2008 |  
|Cash flows from operating activities:                                             |  |                           |          |   |      |   |          |  
|Net income                                                                        |  | $                         | 211,100  |   |      | $ | 66,765   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                           | 17,418   |   |      |   | 13,075   |  
|Net realized investment (gains) losses                                            |  |                           | (181,176 | ) |      |   | 55,641   |  
|Bond amortization, net                                                            |  |                           | 2,218    |   |      |   | 3,643    |  
|Excess tax benefit from exercise of stock options                                 |  |                           | (3       | ) |      |   | (59      | )
|Decease in premiums receivable                                                    |  |                           | 12,223   |   |      |   | 15,185   |  
|Increase in premiums notes receivable                                             |  |                           | (1,711   | ) |      |   | (2,088   | )
|Decrease in deferred policy acquisition costs                                     |  |                           | 18,873   |   |      |   | 3,851    |  
|Decrease in unpaid losses and loss adjustment expenses                            |  |                           | (63,505  | ) |      |   | (82,983  | )
|Decrease in unearned premiums                                                     |  |                           | (16,945  | ) |      |   | (18,748  | )
|Decrease (increase) in income taxes                                               |  |                           | 103,818  |   |      |   | (26,832  | )
|Increase (decrease) in accounts payable and accrued expenses                      |  |                           | 19,119   |   |      |   | (6,353   | )
|Decrease in trading securities in nature, net of realized gains and losses        |  |                           | 3,209    |   |      |   | 1,792    |  
|Share-based compensation                                                          |  |                           | 367      |   |      |   | 327      |  
|Decrease in other payables                                                        |  |                           | (12,840  | ) |      |   | (9,265   | )
|Other, net                                                                        |  |                           | (5,802   | ) |      |   | (1,018   | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                           | 106,363  |   |      |   | 12,933   |  
|Cash flows from investing activities:                                             |  |                           |          |   |      |   |          |  
|Fixed maturities available for sale in nature:                                    |  |                           |          |   |      |   |          |  
|Purchases                                                                         |  |                           | (232,116 | ) |      |   | (412,022 | )
|Sales                                                                             |  |                           | 123,275  |   |      |   | 329,915  |  
|Calls or maturities                                                               |  |                           | 111,710  |   |      |   | 124,949  |  
|Equity securities available for sale in nature:                                   |  |                           |          |   |      |   |          |  
|Purchases                                                                         |  |                           | (143,665 | ) |      |   | (238,349 | )
|Sales                                                                             |  |                           | 155,652  |   |      |   | 176,757  |  
|Net increase in payable for securities                                            |  |                           | 4,127    |   |      |   | 14,335   |  
|Net decrease in short-term investments                                            |  |                           | 110,268  |   |      |   | 53,481   |  
|Purchase of fixed assets                                                          |  |                           | (20,656  | ) |      |   | (29,757  | )
|Sale of fixed assets                                                              |  |                           | 357      |   |      |   | 776      |  
|Business acquisition, net of cash acquired                                        |  |                           | (115,488 | ) |      |   |         |  
|Other, net                                                                        |  |                           | 2,784    |   |      |   | 6,913    |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash (used in) provided by investing activities                               |  |                           | (3,752   | ) |      |   | 26,998   |  
|Cash flows from financing activities:                                             |  |                           |          |   |      |   |          |  
|Dividends paid to shareholders                                                    |  |                           | (63,533  | ) |      |   | (63,491  | )
|Excess tax benefit from exercise of stock options                                 |  |                           | 3        |   |      |   | 59       |  
|Proceeds from stock options exercised                                             |  |                           | 233      |   |      |   | 495      |  
|Proceeds from bank loan                                                           |  |                           | 120,000  |   |      |   | 18,000   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                               |  |                           | 56,703   |   |      |   | (44,937  | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net increase (decrease) in cash                                                   |  |                           | 159,314  |   |      |   | (5,006   | )
|Cash:                                                                             |  |                           |          |   |      |   |          |  
|Beginning of the period                                                           |  |                           | 35,396   |   |      |   | 48,245   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|End of the period                                                                 |  | $                         | 194,710  |   |      | $ | 43,239   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Supplemental disclosures of cash flow information:                                |  |                           |          |   |      |   |          |  
|Interest paid during the period                                                   |  | $                         | 3,689    |   |      | $ | 2,769    |  
|Income taxes (received) paid during the period                                    |  | $                         | (13,903  | ) |      | $ | 37,061   |  
|Net realized (losses) gains from sale of investments                              |  | $                         | (42,877  | ) |      | $ | 15,007   |  

See accompanying Notes to Consolidated Financial Statements.



7



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MERCURY GENERAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The consolidated financial statements include the accounts of Mercury General Corporation (Mercury General) and its directly and indirectly wholly owned insurance and non-insurance subsidiaries (collectively, the
Company). The insurance subsidiaries are: Mercury Casualty Company, Mercury Insurance Company, California Automobile Insurance Company, California General Underwriters Insurance Company, Mercury Insurance Company of Illinois, Mercury
Insurance Company of Georgia, Mercury Indemnity Company of Georgia, Mercury National Insurance Company, American Mercury Insurance Company, American Mercury Lloyds Insurance Company (AML), Mercury County Mutual Insurance Company
(MCM), Mercury Insurance Company of Florida and Mercury Indemnity Company of America. The non-insurance subsidiaries are: Mercury Select Management Company, Inc. (MSMC), American Mercury MGA, Inc., Concord Insurance Services,
Inc., Mercury Insurance Services, LLC, Mercury Group, Inc., AIS Management LLC, Auto Insurance Specialists, LLC (AIS) and PoliSeek AIS Insurance Solutions, Inc. (PoliSeek). AML is not owned by the Company, but is controlled
by the Company through its attorney-in-fact, MSMC. MCM is not owned by the Company, but is controlled through a management contract and therefore its results are included in the consolidated financial statements. The consolidated financial
statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), which differ in some respects from those filed in reports to insurance regulatory authorities. All significant intercompany balances
and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The
most significant estimates and assumptions in the preparation of these consolidated financial statements relate to losses and loss adjustment expenses and evaluation of the recoverability of deferred tax assets. Actual results could differ
materially from those estimates (See Note 1 Significant Accounting Policies of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2008).

The financial data of the Company included herein has been prepared without audit. In the opinion of management, all material adjustments of a normal
recurring nature necessary to present fairly the Companys financial position at June 30, 2009 and the results of operations, comprehensive income and cash flows for the periods presented have been made. Operating results and cash flows
for the six-month period ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

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

2.
Recently Adopted Accounting Standards

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)). While SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141, Business Combinations (SFAS
No. 141), that the acquisition method (referred to as the purchase method in SFAS No. 141) be used for all business combinations and for an acquirer to be identified for each business combination, SFAS No. 141(R) significantly
changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, and acquisition costs. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This replaces the cost-allocation process, which required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on their estimated fair values. Additionally, SFAS No. 141(R) requires costs incurred to effect the acquisition to be recognized separately from the acquisition rather than included in
the cost allocated to the assets acquired and liabilities assumed. SFAS No. 141(R) requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual, which in most types of business combinations will result in
measuring goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. In addition, under SFAS
No. 141(R), changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period impact income tax expense. Effective January 1, 2009, MCC acquired all of the
membership interests of AIS Management LLC, a California limited liability company, which is the parent company of AIS and PoliSeek. The acquisition was accounted for in accordance with SFAS No. 141(R). The adoption of SFAS No. 141(R) did
not have a material impact on the Companys consolidated financial statements.

In March 2008, the Financial Accounting Standards
Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) by requiring expanded disclosures about



8



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an entitys derivative instruments and hedging activities, but does not change the scope of accounting of SFAS No. 133. SFAS No. 161 requires
increased qualitative disclosures such as how and why an entity is using a derivative instrument; how the entity is accounting for its derivative instrument and hedged item under SFAS No. 133 and its related interpretations; and how the
instrument affects the entitys financial position, financial performance, and cash flows. Quantitative disclosures should include information about the fair value of the derivative instrument, including gains and losses, and should contain
more detailed information about the location of the derivative instrument in the entitys financial statements. Credit-risk disclosures should include information about the existence and nature of credit-risk-related contingent features
included in derivative instruments. Credit-risk-related contingent features can be defined as those that require entities, upon the occurrence of a credit event such as a credit rating downgrade, to settle derivative instruments or post collateral.
The Company adopted SFAS No. 161 on January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on the Companys consolidated financial statements.

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

On April 1, 2009, the FASB issued FASB Staff Position Financial Accounting Standard
141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141(R)-1). Under FSP FAS 141(R)-1, an acquirer is required to recognize at fair value an asset
acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. The Company adopted FSP FAS 141(R)-1 on
January 1, 2009. The adoption of FSP FAS 141(R)-1 did not have a material impact on the Companys consolidated financial statements.

Effective for the interim reporting period ending June 30, 2009, the Company adopted FASB Staff Position Financial Accounting Standard 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 clarifies that when there has been a significant decrease in the volume and level of activity for an asset or liability,
some transactions may not be orderly. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for an asset or liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair value in accordance with SFAS No. 157, Fair Value Measurements (SFAS No. 157). The adoption of FSP FAS 157-4 did not have a material
impact on the Companys consolidated financial statements.

Effective for the interim reporting period ending June 30, 2009, the
Company adopted FASB Staff Position Financial Accounting Standard 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP
FAS 107-1 and APB 28-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require related disclosures in summarized financial information at interim reporting periods. FSP FAS
107-1 and APB 28-1 is effective for the interim reporting period ending June 30, 2009. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the Companys consolidated financial statements.

Effective for the interim reporting period ended June 30, 2009, the Company adopted SFAS No. 165, Subsequent Events (SFAS
No. 165). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of SFAS No. 165 did not have a material impact on the Companys consolidated financial statements.



9



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3. Financial Instruments

The financial instruments recorded in the consolidated balance sheet include investments, receivables, interest rate swap agreements, accounts payable, equity contracts, and secured and unsecured notes payable. Due to
their short-term maturity, the carrying amounts of receivables and accounts payable approximate their fair market values. The following table sets forth the carrying amounts and estimated fair values of other financial instruments at June 30,
2009 and December 31, 2008.



|                              |  |                        |           |                   |   |               |  |           |           |  |   |          
|----------------------------- |  | ---------------------- | --------- | ----------------- | - | ------------- |  | --------- | --------- |  | - | ---------
|                              |  | June 30, 2009          |           | December 31, 2008
|                              |  | CarryingValue          |           | FairValue         |   | CarryingValue |  | FairValue
|                              |  | (Amounts in thousands)
|Assets                        |  |                        |           |                   |   |               |  |           |           |  |   |          
|Investments                   |  | $                      | 2,978,182 |                   | $ | 2,978,182     |  | $         | 2,933,820 |  | $ | 2,933,820
|Interest rate swap agreements |  | $                      | 10,523    |                   | $ | 10,523        |  | $         | 14,394    |  | $ | 14,394   
|Liabilities                   |  |                        |           |                   |   |               |  |           |           |  |   |          
|Interest rate swap agreements |  | $                      | 1,509     |                   | $ | 1,509         |  | $         | 1,348     |  | $ | 1,348    
|Equity contracts              |  | $                      | 1,779     |                   | $ | 1,779         |  | $         | 2,803     |  | $ | 2,803    
|Secured notes                 |  | $                      | 138,000   |                   | $ | 138,000       |  | $         |          |  | $ |         
|Unsecured note                |  | $                      | 135,426   |                   | $ | 130,620       |  | $         | 158,625   |  | $ | 146,758  

Methods and assumptions used in estimating fair values are as follows:

Investments

Effective January 1, 2008,
the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 (SFAS No. 159) and elected to apply the fair value
option to all investments (available for sale fixed maturity and equity securities, and short-term investments) existing at the time of adoption and similar securities acquired subsequently. Therefore, these securities are carried at fair value. For
additional disclosures regarding methods and assumptions used in estimating fair values of these securities, see Note 5 of Notes to Consolidated Financial Statements.

Interest rate swap agreements and equity contracts

The fair value of interest rate swap
agreements reflects the estimated amounts that the Company would pay or receive at June 30, 2009 and December 31, 2008 in order to terminate the contracts based on models using inputs, such as interest rate yield curves, observable for
substantially the full term of the contract. For additional disclosures regarding methods and assumptions used in estimating fair values of interest rate swap agreements, see Note 5 of Notes to Consolidated Financial Statements.

Equity contracts

The fair value of equity
contracts is based on quoted prices for identical instruments in active markets. For additional disclosures regarding methods and assumptions used in estimating fair values of equity contracts, see Note 5 of Notes to Consolidated Financial
Statements.

Secured notes

The
fair value of the Companys $120 million and $18 million secured notes is estimated based on assumptions and inputs, such as reset rates, for similar termed notes. The carrying amounts of the Companys secured notes approximate their fair
market value.

Unsecured note

The fair value of the Companys publicly traded $125 million unsecured notes is based on the unadjusted quoted price for identical notes in active markets.

4. Fair Value of Financial Instruments

Gains and losses due to changes in fair value for items
measured at fair value pursuant to election of the fair value option are included in net realized investment gains (losses) in the Companys consolidated statements of operations, while interest and dividend income on the investment holdings
are recognized on an accrual basis on each measurement date and are included in net investment income in the Companys consolidated statements of operations. The primary reasons for electing the fair value option were simplification and
cost-benefit considerations as well as expansion of use of fair value measurement consistent with the long-term measurement objectives of the FASB for accounting for financial instruments. The following table reflects gains (losses) due to changes
in fair value for items measured at fair value pursuant to election of the fair value option under SFAS No. 159:



|                          |  |                             |         |      |                           |         |      |  |   |         |   |  |   |         |  
|------------------------- |  | --------------------------- | ------- | ---- | ------------------------- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                          |  | Three Months ended June 30, |         |      | Six Months ended June 30, |        
|                          |  | 2009                        |         | 2008 |                           |         | 2009 |  |   | 2008    |  
|                          |  | (Amounts in thousands)      |        
|Fixed maturity securities |  | $                           | 46,419  |      | $                         | 51      |      |  | $ | 147,434 |   |  | $ | (313    | )
|Equity securities         |  |                             | 77,198  |      |                           | (13,554 | )    |  |   | 66,919  |   |  |   | (69,857 | )
|Short-term investments    |  |                             |        |      |                           | 36,077  |      |  |   | (3      | ) |  |   | (543    | )
|                          |  |                             |         |      |                           |         |      |  |   |         |   |  |   |         |  
|Total                     |  | $                           | 123,617 |      | $                         | 22,574  |      |  | $ | 214,350 |   |  | $ | (70,713 | )
|                          |  |                             |         |      |                           |         |      |  |   |         |   |  |   |         |  



10



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

5. Fair Value Measurement

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

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

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

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

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

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

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

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

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

Summary of
Significant Valuation Techniques for Financial Assets and Financial Liabilities

The Company obtained unadjusted fair values on
approximately 99% of its portfolio from an independent pricing service. For less than 1% of its portfolio, the Company obtained specific unadjusted broker quotes generally from one knowledgeable outside security broker to determine the fair value of
each security. For 0.1% of its portfolio, where the Company was not able to obtain fair values from the independent pricing service or outside security brokers, management performed discounted cash flow price modeling.



11



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Level 1 Measurements -Fair values of financial assets and financial liabilities are obtained from an
independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure realistic fair values are used
in pricing the investment portfolio.

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

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

Short-term bonds/Money market
accounts: Valued based on unadjusted quoted prices for identical assets.

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

Level 2 Measurements
- Fair values of financial assets and financial liabilities are obtained from an independent pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or valuation models whose inputs are
observable, directly or indirectly, for substantially the full term of the asset or liability. Additional pricing services are used as a comparison to ensure realistic fair values are used in pricing the investment portfolio.

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

Mortgage-backed securities: Comprised of securities that are collateralized by residential mortgage loans. Valued based on models or matrices using multiple
observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. At June 30, 2009 and December 31, 2008, the Company had no holdings in commercial mortgage-backed
securities.

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

Collateralized debt obligations: Valued based on
observable inputs, such as underlying debt instruments and their appropriate benchmark spread, for identical or similar assets in active markets.

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

Interest rate swap agreements: Valued based on models using inputs, such as interest rate yield curves, observable for
substantially the full term of the contract.

Level 3 Measurements - Fair values of financial assets are based on discounted cash flow
price modeling performed by management with inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed trading
level.

Municipal securities: Comprised of certain distressed municipal securities for which valuation is based on models that are widely accepted
in the financial services industry and require projections of future cash flows that are not market observable. Included in this category are $2.9 million of auction rate securities (ARS). ARS are valued based on a discounted cash flow
model with certain inputs that are significant to the valuation, but are not market observable.

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



12



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Assets Measured at Fair Value

The following table presents information about the Companys assets and liabilities measured at fair value on a recurring basis as of June 30, 2009, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value:



|                                       |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|-------------------------------------- |  | ----------------------------------------------------------- | ------- | ------------------------------------------- | - | --------------------------------------- |  | -------------------------- | ----- |  | - | ---------
|                                       |  | June 30, 2009                                              
|                                       |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservable Inputs(Level 3) |  | Balance as ofJune 30, 2009
|                                       |  | (Amounts in thousands)                                     
|Assets                                 |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|Fixed maturity securities:             |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|U.S. government bonds and agencies     |  | $                                                           | 10,099  |                                             | $ |                                        |  | $                          |      |  | $ | 10,099   
|Municipal securities                   |  |                                                             |        |                                             |   | 2,343,571                               |  |                            | 2,856 |  |   | 2,346,427
|Mortgage-backed securities             |  |                                                             |        |                                             |   | 148,167                                 |  |                            |      |  |   | 148,167  
|Corporate securities                   |  |                                                             |        |                                             |   | 86,281                                  |  |                            |      |  |   | 86,281   
|Redeemable preferred stock             |  |                                                             |        |                                             |   | 444                                     |  |                            |       |  |   | 444      
|Collateralized debt obligations        |  |                                                             |        |                                             |   | 33,394                                  |  |                            |       |  |   | 33,394   
|Equity securities:                     |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|Common stock:                          |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|Public utilities                       |  |                                                             | 35,726  |                                             |   |                                        |  |                            |      |  |   | 35,726   
|Banks, trusts and insurance companies  |  |                                                             | 13,291  |                                             |   |                                        |  |                            |      |  |   | 13,291   
|Industrial and other                   |  |                                                             | 197,922 |                                             |   |                                        |  |                            |      |  |   | 197,922  
|Non-redeemable preferred stock         |  |                                                             |        |                                             |   | 11,874                                  |  |                            |      |  |   | 11,874   
|Short-term bonds/Money market accounts |  |                                                             | 94,535  |                                             |   |                                        |  |                            |      |  |   | 94,535   
|Equity contracts                       |  |                                                             | 22      |                                             |   |                                        |  |                            |      |  |   | 22       
|Interest rate swap agreements          |  |                                                             |        |                                             |   | 10,523                                  |  |                            |      |  |   | 10,523   
|                                       |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|Total assets at fair value             |  | $                                                           | 351,595 |                                             | $ | 2,634,254                               |  | $                          | 2,856 |  | $ | 2,988,705
|                                       |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|Liabilities                            |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|Equity contracts                       |  | $                                                           | 1,779   |                                             | $ |                                        |  | $                          |      |  | $ | 1,779    
|Interest rate swap agreements          |  |                                                             |        |                                             |   | 1,509                                   |  |                            |      |  |   | 1,509    
|                                       |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          
|Total liabilities at fair value        |  | $                                                           | 1,779   |                                             | $ | 1,509                                   |  | $                          |      |  | $ | 3,288    
|                                       |  |                                                             |         |                                             |   |                                         |  |                            |       |  |   |          



13



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



|                                       |  |                                                             |         |                                             |   |                                         |  |                                |       |  |   |          
|-------------------------------------- |  | ----------------------------------------------------------- | ------- | ------------------------------------------- | - | --------------------------------------- |  | ------------------------------ | ----- |  | - | ---------
|                                       |  | December 31, 2008                                          
|                                       |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |         | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservable Inputs(Level 3) |  | Balance as ofDecember 31, 2008
|                                       |  | (Amounts 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   
|Collateralized debt obligations        |  |                                                             |         |                                             |   | 13,120                                  |  |                                |       |  |   | 13,120   
|Redeemable preferred stock             |  |                                                             |        |                                             |   | 2,934                                   |  |                                |      |  |   | 2,934    
|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 bonds/Money market accounts |  |                                                             | 204,678 |                                             |   |                                        |  |                                |      |  |   | 204,678  
|Equity contracts                       |  |                                                             | 78      |                                             |   |                                        |  |                                |      |  |   | 78       
|Interest rate swap agreements          |  |                                                             |        |                                             |   | 14,394                                  |  |                                |      |  |   | 14,394   
|                                       |  |                                                             |         |                                             |   |                                         |  |                                |       |  |   |          
|Total assets at fair value             |  | $                                                           | 451,424 |                                             | $ | 2,493,806                               |  | $                              | 2,984 |  | $ | 2,948,214
|                                       |  |                                                             |         |                                             |   |                                         |  |                                |       |  |   |          
|Liabilities                            |  |                                                             |         |                                             |   |                                         |  |                                |       |  |   |          
|Equity contracts                       |  | $                                                           | 2,803   |                                             | $ |                                        |  | $                              |      |  | $ | 2,803    
|Interest rate swap agreements          |  |                                                             |        |                                             |   | 1,348                                   |  |                                |      |  |   | 1,348    
|Other                                  |  |                                                             | 2,492   |                                             |   |                                        |  |                                |      |  |   | 2,492    
|                                       |  |                                                             |         |                                             |   |                                         |  |                                |       |  |   |          
|Total liabilities at fair value        |  | $                                                           | 5,295   |                                             | $ | 1,348                                   |  | $                              |      |  | $ | 6,643    
|                                       |  |                                                             |         |                                             |   |                                         |  |                                |       |  |   |          

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



14



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The following table provides a summary of changes in fair value of Level 3 financial assets and financial
liabilities held at fair value at June 30, 2009. There were no Level 3 financial assets and financial liabilities held at June 30, 2008.



|                                                                                                            |  |                                 |       |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | -
|                                                                                                            |  | Three Months EndedJune 30, 2009 |      
|                                                                                                            |  | Fixed Maturities                |      
|                                                                                                            |  | (Amounts in thousands)          |      
|Fair value at March 31, 2009                                                                                |  | $                               | 3,264 |  
|Realized losses included in net realized investment gains                                                   |  |                                 | (408  | )
|                                                                                                            |  |                                 |       |  
|Fair value at June 30, 2009                                                                                 |  | $                               | 2,856 |  
|                                                                                                            |  |                                 |       |  
|The amount of total losses for the period included in earnings attributable to assets held at June 30, 2009 |  | $                               | (408  | )
|                                                                                                            |  |                                 |       |  
|                                                                                                            | 
|                                                                                                            |  | Six Months EndedJune 30, 2009   |      
|                                                                                                            |  | Fixed Maturities                |      
|                                                                                                            |  | (Amounts in thousands)          |      
|Fair value at December 31, 2008                                                                             |  | $                               | 2,984 |  
|Realized losses included in net realized investment gains                                                   |  |                                 | (128  | )
|                                                                                                            |  |                                 |       |  
|Fair value at June 30, 2009                                                                                 |  | $                               | 2,856 |  
|                                                                                                            |  |                                 |       |  
|The amount of total losses for the period included in earnings attributable to assets held at June 30, 2009 |  | $                               | (128  | )
|                                                                                                            |  |                                 |       |  

On January 1, 2009, the Company adopted SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities measured on a nonrecurring basis. At June 30, 2009, the Company had no applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.

6. Derivative Financial Instruments

The Company is
exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts on various equity securities are entered into to manage
the price risk associated with forecasted purchases or sales of such securities. Interest rate swaps are entered into to manage interest rate risk associated with the Companys loans with fixed or floating rates.

Fair value hedge

Effective January 2,
2002, the Company entered into an interest rate swap of a 7.25% fixed rate obligation on a $125 million senior note for a floating rate of LIBOR plus 107 basis points. The swap is designated as a fair value hedge and qualifies for the shortcut
method under SFAS No. 133. In accordance with SFAS No. 133, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings. The Company
includes the gain or loss on the hedged item in the same line iteminterest expenseas the offsetting loss or gain on the related interest rate swaps as follows:



|                                |  |                                 |        |                               |                       |   |                       |  |   |                       |   |  |   |      
|------------------------------- |  | ------------------------------- | ------ | ----------------------------- | --------------------- | - | --------------------- |  | - | --------------------- | - |  | - | -----
|                                |  | Three Months EndedJune 30, 2009 |        | Six Months EndedJune 30, 2009
|Income Statement Classification |  | Gains/(Losses)on Swap           |        |                               | Gains/(Losses)on Loan |   | Gains/(Losses)on Swap |  |   | Gains/(Losses)on Loan
|                                |  | (Amounts in thousands)         
|Other revenue                   |  | $                               | (2,472 | )                             |                       | $ | 2,472                 |  | $ | (3,871                | ) |  | $ | 3,871

As of June 30, 2009, the total fair market value of the Companys interest rate swap
designated as a fair value hedge was $10.5 million.



15



---

Cash flow hedge

On March 3, 2008, the Company entered into an interest rate swap of a floating LIBOR rate on an $18 million bank loan for a fixed rate of 3.75%. The swap is designated as a cash flow hedge and qualifies for the
shortcut method under SFAS No. 133. In accordance with SFAS No. 133, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings.

As of June 30, 2009, the total fair market value of
the Companys interest rate swap designated as a cash flow hedge was $(0.8) million.

Fair value amounts, and gains and losses on derivative
instruments

The following tables provide the location and amounts of derivative fair values in the consolidated balance sheets and
derivative gains and losses in the consolidated statements of operations:

Fair Values of Derivative Instruments



|                                                                           |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      
|-------------------------------------------------------------------------- |  | ---------------------- |  | --------------------- | ------ | --------------------- | ------------ | ----------------- | - | --------------------- |  | ----------------- |  | --------------------- | ----- | ---------- | ----------------- |  | - | -----
|                                                                           |  | Asset Derivatives      |  | Liability Derivatives
|                                                                           |  | June 30, 2009          |  | December 31, 2008     |        | June 30, 2009         |              | December 31, 2008
|                                                                           |  | (Amounts in thousands)
|                                                                           |  | Balance SheetLocation  |  | FairValues            |        | Balance SheetLocation |              | FairValues        |   | Balance SheetLocation |  | FairValues        |  | Balance SheetLocation |       | FairValues
|Derivatives designated as hedging instruments under SFAS No. 133           |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      
|Interest rate contracts                                                    |  | Other assets           |  | $                     | 10,523 |                       | Other assets |                   | $ | 14,394                |  | Other liabilities |  | $                     | 846   |            | Other liabilities |  | $ | 1,348
|                                                                           |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      
|Total derivatives designated as hedging instruments under SFAS No. 133     |  |                        |  | $                     | 10,523 |                       |              |                   | $ | 14,394                |  |                   |  | $                     | 846   |            |                   |  | $ | 1,348
|                                                                           |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      
|Derivatives not designated as hedging instruments under SFAS No. 133       |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      
|Interest rate contract                                                     |  |                        |  |                       |        |                       |              |                   |   |                       |  | Other liabilities |  | $                     | 663   |            |                   |  |   |      
|Equity contracts                                                           |  | Investments            |  | $                     | 22     |                       | Investments  |                   | $ | 78                    |  | Other liabilities |  |                       | 1,779 |            | Other liabilities |  | $ | 2,803
|                                                                           |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      
|Total derivatives not designated as hedging instruments under SFAS No. 133 |  |                        |  | $                     | 22     |                       |              |                   | $ | 78                    |  |                   |  | $                     | 2,442 |            |                   |  | $ | 2,803
|                                                                           |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      
|Total derivatives                                                          |  |                        |  | $                     | 10,545 |                       |              |                   | $ | 14,472                |  |                   |  | $                     | 3,288 |            |                   |  | $ | 4,151
|                                                                           |  |                        |  |                       |        |                       |              |                   |   |                       |  |                   |  |                       |       |            |                   |  |   |      

The Effect of Derivative Instruments on the Statements of Operations

for Three Months and Six Months Ended June 30, 2009 and 2008



|                                                            |  |                                                              |  |                                                              |       |      |   |       |  |   |       |  |   |      
|----------------------------------------------------------- |  | ------------------------------------------------------------ |  | ------------------------------------------------------------ | ----- | ---- | - | ----- |  | - | ----- |  | - | -----
|Derivatives in SFAS No. 133 Fair ValueHedging Relationships |  | Location of Gain or (Loss)Recognized in Income onDerivatives |  | Amount of Gain or (Loss) Recognized in Income on Derivatives
|                                                            |  | Three Months Ended June 30,                                  |  | Six Months Ended June 30,                                   
|                                                            |  | 2009                                                         |  | 2008                                                         |       | 2009 |   | 2008 
|                                                            |  |                                                              |  | (Amounts in thousands)                                      
|Interest rate contracts                                     |  | Interest expense                                             |  | $                                                            | 1,629 |      | $ | 1,024 |  | $ | 3,348 |  | $ | 2,890



|                                                          |                            |                                                          |                          |                                                                       |      |                                                                      |      |                          |     |      |   |      |  |               |  |      |   |  |   |   |  |   |   |  |   |  
|--------------------------------------------------------- | -------------------------- | -------------------------------------------------------- | ------------------------ | --------------------------------------------------------------------- | ---- | -------------------------------------------------------------------- | ---- | ------------------------ | --- | ---- | - | ---- |  | ------------- |  | ---- | - |  | - | - |  | - | - |  | - | -
|Derivatives in SFAS No. 133Cash Flow HedgingRelationships |                            | Amount of Gain or (Loss)Recognized in OCI on Derivatives |                          | Location of Gain or (Loss)Reclassified from AccumulatedOCIinto
Income |      | Amount of Gain or (Loss)Reclassified from Accumulated OCIinto Income
|                                                          | Three MonthsEnded June 30, |                                                          | Six MonthsEnded June 30, |                                                                       |      | Three MonthsEnded June 30,                                           |      | Six MonthsEnded June 30,
|                                                          | 2009                       |                                                          | 2008                     |                                                                       | 2009 |                                                                      | 2008 |                          |     | 2009 |   | 2008 |  | 2009          |  | 2008
|                                                          |                            | (Amounts in thousands)                                   |                          |                                                                       |      | (Amounts in thousands)                                              
|Interest rate contracts                                   |                            | $                                                        | 490                      |                                                                       | $    | 713                                                                  |      | $                        | 502 |      | $ | 269  |  | Other revenue |  | $    |  |  | $ |  |  | $ |  |  | $ | 



16



---

|                                                                   |  |                                                               |  |                                                            |       |      |   |       |      |   |       |   |  |   |      
|------------------------------------------------------------------ |  | ------------------------------------------------------------- |  | ---------------------------------------------------------- | ----- | ---- | - | ----- | ---- | - | ----- | - |  | - | -----
|Derivatives Not Designated asHedging Instruments underSFAS No. 133 |  | Location of Gain or (Loss)Recognized in Income on Derivatives |  | Amount of Gain or (Loss)Recognized in Income onDerivatives
|                                                                   |  | Three MonthsEnded June 30,                                    |  | Six MonthsEnded June 30,                                  
|                                                                   |  | 2009                                                          |  | 2008                                                       |       | 2009 |   |       | 2008
|                                                                   |  |                                                               |  | (Amounts in thousands)                                    
|Interest rate contract                                             |  | Other revenue                                                 |  | $                                                          | 1,469 |      | $ |      |      | $ | (663  | ) |  | $ |     
|Equity contracts                                                   |  | Net realized investment gains                                 |  |                                                            | 2,971 |      |   | 4,247 |      |   | 6,409 |   |  |   | 8,176
|                                                                   |  |                                                               |  |                                                            |       |      |   |       |      |   |       |   |  |   |      
|Total                                                              |  |                                                               |  | $                                                          | 4,440 |      | $ | 4,247 |      | $ | 5,746 |   |  | $ | 8,176
|                                                                   |  |                                                               |  |                                                            |       |      |   |       |      |   |       |   |  |   |      

The interest rate contract not designated as hedging instrument under SFAS No. 133 is an
interest rate swap that the Company entered into on February 6, 2009. The purpose of the swap is to offset the variability of cash flows resulting from the variable interest rate of a $120 million credit facility which was used for the
acquisition of AIS.

Most equity contracts consist of covered calls. The Company writes covered calls on underlying equity positions held
as an enhanced income strategy. This is permitted for the Companys insurance subsidiaries under statutory regulations. The Company manages the risk associated with covered calls through strict capital limitations and asset allocation
throughout various industries.

For additional disclosures regarding equity contracts, see Note 5 of Notes to Consolidated Financial
Statements.

7. Acquisition

Effective
January 1, 2009, the Company acquired all of the membership interests of AIS Management LLC, a California limited liability company, which is the parent company of AIS and PoliSeek. AIS is a major producer of automobile insurance in the state
of California and was the Companys largest independent broker. This preexisting relationship did not require measurement at the date of acquisition as there was no settlement of executory contracts between the Company and AIS as part of the
acquisition.

Goodwill of $38 million arising from the acquisition consists largely of the efficiencies and economies of scale expected
from combining the operations of the Company and AIS, and is expected to be fully deductible for income tax purposes in 2009 and future years.

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



|                                                                           |  |                        |         |  
|-------------------------------------------------------------------------- |  | ---------------------- | ------- | -
|                                                                           |  | January 1, 2009        |        
|                                                                           |  | (Amounts in thousands) |        
|Consideration                                                              |  |                        |         |  
|Cash                                                                       |  | $                      | 120,000 |  
|                                                                           |  |                        |         |  
|Fair value of total consideration transferred                              |  | $                      | 120,000 |  
|                                                                           |  |                        |         |  
|                                                                           | 
|Acquisition-related costs                                                  |  | $                      | 2,000   |  
|                                                                           |  |                        |         |  
|                                                                           | 
|Recognized amounts of identifiable assets acquired and liabilities assumed |  |                        |         |  
|Financial assets                                                           |  | $                      | 12,875  |  
|Property, plant, and equipment                                             |  |                        | 2,915   |  
|Favorable leases                                                           |  |                        | 1,725   |  
|Trade names                                                                |  |                        | 15,400  |  
|Customer relationships                                                     |  |                        | 51,200  |  
|Software & technology                                                      |  |                        | 4,850   |  
|Liabilities assumed                                                        |  |                        | (6,608  | )
|                                                                           |  |                        |         |  
|Total identifiable net assets                                              |  |                        | 82,357  |  
|                                                                           | 
|Goodwill                                                                   |  |                        | 37,643  |  
|                                                                           |  |                        |         |  
|Total                                                                      |  | $                      | 120,000 |  
|                                                                           |  |                        |         |  



17



---

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

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

The fair value of the financial assets acquired includes cash, prepaid expenses and receivables from
customers. The acquired receivables of $6.6 million at fair value were fully collected during the three-month period ended March 31, 2009. The fair value of the liabilities assumed includes accounts payable and other accrued liabilities.

The following table reflects the amount of revenue and net income of AIS, which are included in the Companys consolidated statement
of operations for the three-month and six-month periods ended June 30, 2009, and the revenue of the combined entity for the three-month and six-month periods ended June 30, 2008, had the acquisition date been January 1, 2008.



|                |  |                                             |         |                                           |   |          
|--------------- |  | ------------------------------------------- | ------- | ----------------------------------------- | - | ---------
|                |  | Three Months ended June 30,2008 (pro forma) |         | Six Months ended June 30,2008 (pro forma)
|                |  | (Amounts in thousands)                     
|Combined entity |  |                                             |         |                                           |   |          
|Revenues (2)    |  | $                                           | 791,004 |                                           | $ | 1,463,009
|Net income (1)  |  |                                             | N/A     |                                           |   | N/A      
|                |  |                                            
|                |  | Three Months ended June 30,2009             |         | Six Months ended June 30,2009            
|                |  | (Amounts in thousands)                     
|AIS             |  |                                             |         |                                           |   |          
|Revenues (3)    |  | $                                           | 3,201   |                                           | $ | 5,956    
|Net income (3)  |  | $                                           | 530     |                                           | $ | 673      

| | 
| | 

| | (1) | 2008 pro forma net income for the combined entity is not available, as AIS was previously consolidated into its parent company and separate financial statements were not available.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Includes net premiums earned, net investment income, net realized investment gains/losses and commission revenues.
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (3) | Excludes intercompany transactions with the Companys insurance subsidiaries.
| | --- | -----------------------------------------------------------------------------

8. Intangible Assets

The following table reflects the components of intangible assets:



|                        |  |                        |        |                         |   |        |                    |  |                      |        |                         |   |                    |  |   |   |  |   |  
|----------------------- |  | ---------------------- | ------ | ----------------------- | - | ------ | ------------------ |  | -------------------- | ------ | ----------------------- | - | ------------------ |  | - | - |  | - | -
|                        |  | June 30, 2009          |        | December 31, 2008      
|                        |  | Gross CarryingAmount   |        | AccumulatedAmortization |   |        | Net CarryingAmount |  | Gross CarryingAmount |        | AccumulatedAmortization |   | Net CarryingAmount
|                        |  | (Amounts in thousands) |        | (Amounts in thousands) 
|Customer relationships  |  | $                      | 51,640 |                         | $ | (2,426 | )                  |  | $                    | 49,214 |                         | $ |                   |  | $ |  |  | $ | 
|Trade names             |  |                        | 15,400 |                         |   | (321   | )                  |  |                      | 15,079 |                         |   |                   |  |   |  |  |   | 
|Software and technology |  |                        | 4,850  |                         |   | (353   | )                  |  |                      | 4,497  |                         |   |                   |  |   |  |  |   | 
|Favorable leases        |  |                        | 1,725  |                         |   | (286   | )                  |  |                      | 1,439  |                         |   |                   |  |   |  |  |   | 
|                        |  |                        |        |                         |   |        |                    |  |                      |        |                         |   |                    |  |   |   |  |   |  
|                        |  | $                      | 73,615 |                         | $ | (3,386 | )                  |  | $                    | 70,229 |                         | $ |                   |  | $ |  |  | $ | 
|                        |  |                        |        |                         |   |        |                    |  |                      |        |                         |   |                    |  |   |   |  |   |  



18



---

Intangible assets are amortized on a straight-line basis over their weighted average lives. Intangible
assets amortization expense was $1.7 million for the three-month period ended June 30, 2009 and $3.4 million for the six-month period ended June 30, 2009. The following table outlines the estimated future amortization expense related to
intangible assets as of June 30, 2009:



|                        |  |                        |       
|----------------------- |  | ---------------------- | ------
|Year Ended December 31, |  | (Amounts in thousands)
|2009                    |  | $                      | 3,406 
|2010                    |  |                        | 6,812 
|2011                    |  |                        | 6,358 
|2012                    |  |                        | 6,144 
|2013                    |  |                        | 5,969 
|Thereafter              |  |                        | 41,540

9. Goodwill

There are no changes in the carrying amount of goodwill for the three-month period ended June 30, 2009. The changes in the carrying amount of goodwill for the six-month period ended June 30, 2009 are as
follows:



|         |  |                                |        |              |   |                          |  |                            |       |  |   |       
|-------- |  | ------------------------------ | ------ | ------------ | - | ------------------------ |  | -------------------------- | ----- |  | - | ------
|         |  | Six Months ended June 30, 2009
|         |  | Balance as ofJanuary 1, 2009   |        | Acquisitions |   | Purchasepriceadjustments |  | Balance as ofJune 30, 2009
|         |  | (Amounts in thousands)        
|Goodwill |  | $                              | 41,557 |              | $ |                         |  | $                          | 1,293 |  | $ | 42,850

The purchase price adjustments are the result of additional information obtained in conjunction
with the finalization of the purchase price allocation as of March 31, 2009. Goodwill is reviewed for impairment on an annual basis and between annual tests if indicators of potential impairment exist. No indications of impairment were
identified during any of the periods presented.

10. Share-Based Compensation

The Company accounts for share-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123(R)), using the modified prospective transition method. Under this transition method, share-based compensation expense includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as
of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Share-based compensation expense for all share-based payment
awards granted or modified on or after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company recognizes these compensation costs on a straight-line basis over the
requisite service period of the award, which is the option vesting term of four or five years, for only those shares expected to vest. The fair value of stock option awards is estimated using the Black-Scholes option pricing model.

11. Income Taxes

The Company accounts for
uncertainty in income taxes in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 provides
guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return related to uncertainties in income taxes. FIN No. 48 prescribes a more-likely-than-not recognition threshold
that must be met before a tax benefit can be recognized in the financial statements. For a tax position that meets the recognition threshold, the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate
settlement is recognized in the financial statements.

The Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states. Tax years that remain subject to examination by major taxing jurisdictions are 2005 through 2008 for federal taxes and 2001 through 2008 for California state taxes.

There were no material changes to the total amount of unrecognized tax benefits related to tax uncertainties during the six months ended June 30,
2009. The Company does not expect any changes in such unrecognized tax benefits to have any significant impact on its consolidated financial statements within the next 12 months. The Company recognizes interest and assessed penalties related to
unrecognized tax benefits as part of income taxes.



19



---

The Company is under examination by the California Franchise Tax Board for tax years 2001 through 2005.
The taxing authority has proposed significant adjustments to the Companys California tax liabilities. Management does not believe that the ultimate outcome of this examination will have a material impact on the Companys financial
position. However, an unfavorable outcome may have a material impact on the Companys results of operations in the period of such resolution.

The Company accounts for current and deferred income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded with respect to temporary
differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. Where, in managements judgment and based on the weight of all available evidence, it is more likely than not that some amount of
recorded deferred tax assets will not be realized, a valuation allowance is established for the portion that is not realizable.

At
June 30, 2009, the Companys deferred income taxes were in a net asset position primarily as a result of the fair value declines in the investment portfolio during 2008, which resulted from extreme volatility in the capital markets and a
widening of credit spreads beyond historic norms. Realization of deferred tax assets is dependent on generating sufficient taxable income of an appropriate nature to offset tax losses. The Company believes that through the use of prudent tax
planning strategies and the generation of capital gains, sufficient income will be realized in order to avoid losing the full benefits of its deferred tax assets. As a result of significant increases in the value of the Companys securities
portfolio during the three months ended June 30, 2009, the Company reversed a valuation allowance of $2.2 million recognized at March 31, 2009. Although realization is not assured, management believes it is more likely than not that the
Companys deferred tax assets will be realized.

12. Contingencies

The Company is, from time to time, named as a defendant in various lawsuits incidental to its insurance business. In most of these actions, plaintiffs
assert claims for punitive damages, which are not insurable under judicial decisions. The Company has established reserves for lawsuits in which the Company is able to estimate its potential exposure and the likelihood that the court will rule
against the Company is probable. The Company vigorously defends these actions, unless a reasonable settlement appears appropriate. An unfavorable ruling against the Company in the actions currently pending may have a material impact on the
Companys quarterly results of operations; however, none is expected to be material to the Companys financial position. For a discussion of the Companys pending material litigation, see the Companys Annual Report on Form
10-K for the year ended December 31, 2008.

13. Recently Issued Accounting Standards

In April 2009, the FASB issued Staff Position Financial Accounting Standard 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. As the Company adopted SFAS No. 159 and elected to apply the fair value option to all available for sale investments, FSP FAS 115-2 and
FAS 124-2 is not applicable to the Company.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS No. 168). SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for the interim reporting period ending September 30, 2009. The Company is assessing the impact of adopting SFAS No. 168 on the Companys
consolidated financial statements.

14. Subsequent Events

The Company evaluated subsequent events through August 4, 2009, the date the financial statements were issued, and noted no significant matters to be disclosed.



20



---

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

I. Overview

A. General

The operating results of property and casualty insurance companies are subject to significant quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and severity of
losses, natural disasters, general economic conditions, the general regulatory environment in those states in which an insurer operates, state regulation of premium rates, and other factors such as changes in tax laws. The property and casualty
industry has been highly cyclical, with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. These cycles can have a large impact on the ability of the Company to
grow and retain business. Additionally, with the adoption of SFAS No. 159, changes in the fair value of the investment portfolio are reflected in the consolidated statements of operations, which may result in volatility of earnings,
particularly in times of high volatility in the capital markets.

The Company utilizes standard industry measures to report operating
results that may not be presented in accordance with GAAP. Included within Managements Discussion and Analysis of Financial Condition and Results of Operations is a non-GAAP financial measure, net premiums written, which represents the
premiums charged on policies issued during a fiscal period less any reinsurance. The measure is not intended to replace, and should be read in conjunction with, the Companys GAAP financial results and is reconciled to the most directly
comparable GAAP measure, net premiums earned, below in Results of Operations.

B. Operations

The Company generates its revenues through the issuance of insurance policies, primarily covering personal automobiles and dwellings through 13 insurance
subsidiaries (Insurance Companies). The Company also offers mechanical breakdown insurance, commercial and dwelling fire insurance, umbrella insurance, commercial automobile insurance and commercial property insurance. These policies are
mostly sold through independent agents and brokers who receive a commission averaging 17% of net premiums written for selling policies. The Company believes that it has a thorough underwriting process that gives the Company an advantage over its
competitors. The Company views its agent relationships and underwriting process as one of its primary competitive advantages because it allows the Company to charge lower prices yet realize better margins than many competitors. The Company operates
primarily in California, the only state in which it operated prior to 1990. The Company has since expanded its operations into the following states: Georgia and Illinois (1990), Oklahoma and Texas (1996), Florida (1998), Virginia and New York
(2001), New Jersey (2003), and Arizona, Pennsylvania, Michigan and Nevada (2004). Direct premiums written during the six-month period ended June 30, 2009 by state and line of business were:



|             |  |                                |           |   |                |   |        |            |  |   |            |   |  |       |        |   |  |   |           |   |  |      |  
|------------ |  | ------------------------------ | --------- | - | -------------- | - | ------ | ---------- |  | - | ---------- | - |  | ----- | ------ | - |  | - | --------- | - |  | ---- | -
|             |  | Six Months ended June 30, 2009 |          
|             |  | Private PassengerAuto          |           |   | CommercialAuto |   |        | Homeowners |  |   | OtherLines |   |  | Total |        |   |  |  
|             |  | (Amounts in thousands)         |          
|California   |  | $                              | 863,279   |   |                | $ | 36,481 |            |  | $ | 101,201    |   |  | $     | 26,549 |   |  | $ | 1,027,510 |   |  | 78.5 | %
|Florida      |  |                                | 70,169    |   |                |   | 7,535  |            |  |   | 6,986      |   |  |       | 3,208  |   |  |   | 87,898    |   |  | 6.7  | %
|Texas        |  |                                | 35,977    |   |                |   | 3,716  |            |  |   | 791        |   |  |       | 8,376  |   |  |   | 48,860    |   |  | 3.7  | %
|New Jersey   |  |                                | 40,467    |   |                |   |       |            |  |   |           |   |  |       | 48     |   |  |   | 40,515    |   |  | 3.1  | %
|Other states |  |                                | 81,000    |   |                |   | 3,764  |            |  |   | 8,171      |   |  |       | 12,161 |   |  |   | 105,096   |   |  | 8.0  | %
|             |  |                                |           |   |                |   |        |            |  |   |            |   |  |       |        |   |  |   |           |   |  |      |  
|Total        |  | $                              | 1,090,892 |   |                | $ | 51,496 |            |  | $ | 117,149    |   |  | $     | 50,342 |   |  | $ | 1,309,879 |   |  | 100  | %
|             |  |                                |           |   |                |   |        |            |  |   |            |   |  |       |        |   |  |   |           |   |  |      |  
|             |  |                                | 83.3      | % |                |   | 3.9    | %          |  |   | 9.0        | % |  |       | 3.8    | % |  |   | 100       | % |  |      |  

The Company also generates income from its investment portfolio. Approximately $74.1 million in
pre-tax investment income was generated during the six-month period ended June 30, 2009 on average investments of approximately $3.2 billion, at cost, for the six-month period ended June 30, 2009, compared to $78.3 million pre-tax
investment income during the corresponding period in 2008 on average investments of approximately $3.5 billion, at cost, for the six-month period ended June 30, 2008. The portfolio is managed by Company personnel with a view towards maximizing
after-tax yields and limiting interest rate and credit risk.

The Companys operating results have allowed it to consistently generate
positive cash flow from operations, which was approximately $106.4 million and $12.9 million for the six-month periods ended June 30, 2009 and 2008, respectively. Cash flow from operations has historically been used to pay shareholder dividends
and to help support growth.



21



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II. Results of Operations

Three Months Ended June 30, 2009 compared to Three Months Ended June 30, 2008

A. Revenue

Net premiums earned and net premiums written for the three-month period ended June 30, 2009 decreased approximately 7.3% and 6.8%, respectively, from
the corresponding period in 2008. The decrease in net premiums written is primarily due to a decrease in the number of policies written and slightly lower average premiums per policy reflecting the continuing soft market conditions.

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



|                                  |  |                             |         |      |   |        
|--------------------------------- |  | --------------------------- | ------- | ---- | - | -------
|                                  |  | Three Months Ended June 30,
|                                  |  | 2009                        |         | 2008
|                                  |  | (in thousands)             
|Net premiums written              |  | $                           | 637,405 |      | $ | 684,177
|Decrease in net unearned premiums |  |                             | 21,806  |      |   | 27,027 
|                                  |  |                             |         |      |   |        
|Net premiums earned               |  | $                           | 659,211 |      | $ | 711,204
|                                  |  |                             |         |      |   |        

B. Profitability

Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. The following table reflects the Insurance Companies loss ratio, expense ratio and combined
ratio determined in accordance with GAAP:



|               |  |                             |   |  |      |  
|-------------- |  | --------------------------- | - |  | ---- | -
|               |  | Three Months ended June 30, |  
|               |  | 2009                        |   |  | 2008 |  
|Loss ratio     |  | 67.6                        | % |  | 68.8 | %
|Expense ratio  |  | 28.5                        | % |  | 28.2 | %
|               |  |                             |   |  |      |  
|Combined ratio |  | 96.1                        | % |  | 97.0 | %
|               |  |                             |   |  |      |  

The loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums
earned. The loss ratio was affected by positive development of approximately $31 million and adverse development of approximately $9 million on prior periods loss reserves for the three-month periods ended June 30, 2009 and 2008,
respectively. Excluding the effect of prior accident years loss development, the loss ratio was 72.3% and 67.6% for the three-month periods ended June 30, 2009 and 2008, respectively. The increase in the loss ratio excluding the effect of
prior accident years loss development is primarily due to increased loss severity and lower average premiums earned per policy, partially offset by lower loss frequency.

The expense ratio is determined by matching expenses to the period over which net premiums were earned, rather than to the period that net premiums were
written. The expense ratio slightly increased primarily due to the impact of the amortization of AIS deferred commissions, which is described below.

The combined ratio of losses and expenses is the key measure of underwriting performance traditionally used in the property and casualty insurance industry. A combined ratio under 100% generally reflects profitable
underwriting results; and a combined ratio over 100% generally reflects unprofitable underwriting results. The Companys underwriting performance contributed approximately $26 million of income (approximately $5 million of loss when excluding
prior accident periods reserve development) and approximately $21 million of income (approximately $30 million of income when excluding prior accident periods reserve development) to the Companys results of operations before income tax expense
for the three-month periods ended June 30, 2009 and 2008, respectively.

Prior to the acquisition of AIS, the Company deferred the
recognition of commissions paid to AIS to match the earnings of the related premiums. As AIS is now a wholly-owned subsidiary, commissions paid are no longer deferrable. During the three-month period ended June 30, 2009, the amortization of
deferred commissions offset by deferrable direct sales cost impacted the statement of operations by $3 million. The Company expects no material impact after June 30, 2009.



22



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C. Investments

The following table summarizes the investment results of the Company:



|                                     |  |                             |           |   |      |   |           |  
|------------------------------------ |  | --------------------------- | --------- | - | ---- | - | --------- | -
|                                     |  | Three Months ended June 30, |          
|                                     |  | 2009                        |           |   | 2008 |  
|                                     |  | (Amounts in thousands)      |          
|Average invested assets at cost (1)  |  | $                           | 3,195,308 |   |      | $ | 3,455,387 |  
|Net investment income:               |  |                             |           |   |      |   |           |  
|Before income taxes                  |  | $                           | 36,212    |   |      | $ | 38,995    |  
|After income taxes                   |  | $                           | 32,557    |   |      | $ | 34,441    |  
|Average annual yield on investments: |  |                             |           |   |      |   |           |  
|Before income taxes                  |  |                             | 4.5       | % |      |   | 4.5       | %
|After income taxes                   |  |                             | 4.1       | % |      |   | 4.0       | %
|Net realized investment gains        |  | $                           | 99,862    |   |      | $ | 36,496    |  

| | 
| | 

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

Included in net income are net realized investment gains of $99.9 million for the three-month period ended June 30, 2009 compared with net realized investment gains of $36.5 million for the three-month period
ended June 30, 2008. Net realized investment gains include gains of $123.6 million for the three-month period ended June 30, 2009 due to changes in the fair value of total investments measured at fair value pursuant to SFAS No. 159
compared with $22.6 million for the three-month period ended June 30, 2008. The gains during the three-month period ended June 30, 2009 arise from the market value improvements on the Companys fixed maturity and equity securities.
During the three-month period ended June 30, 2009, the Company recorded approximately $46.4 million and $77.2 million in gains due to changes in the fair value of its fixed maturity portfolio and equity portfolio, respectively. The primary
cause of the significant gains in fair value of equity securities was the overall improvement in the equity markets, which saw a growth of approximately 15.2% in the S&P 500 Index during the three-month period ended June 30, 2009.

The income tax expenses for the three-month periods ended June 30, 2009 and 2008 were $46.5 million and $25.5 million, respectively.
The increase resulted primarily from changes in the fair value of the investment portfolio.

Six Months Ended June 30, 2009 compared to Six Months
Ended June 30, 2008

A. Revenue

Net premiums earned and net premiums written in the six-month period ended June 30, 2009 decreased approximately 7.5% and 7.4%, respectively, from the corresponding period in 2008. The decrease in net premiums written is primarily due
to a decrease in the number of policies written and slightly lower average premiums per policy reflecting the continuing soft market conditions.

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



|                                  |  |                           |           |      |   |          
|--------------------------------- |  | ------------------------- | --------- | ---- | - | ---------
|                                  |  | Six Months Ended June 30,
|                                  |  | 2009                      |           | 2008
|                                  |  | (in thousands)           
|Net premiums written              |  | $                         | 1,308,297 |      | $ | 1,413,443
|Decrease in net unearned premiums |  |                           | 16,977    |      |   | 18,677   
|                                  |  |                           |           |      |   |          
|Net premiums earned               |  | $                         | 1,325,274 |      | $ | 1,432,120
|                                  |  |                           |           |      |   |          



23



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B. Profitability

Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. The following table reflects the Insurance Companies loss ratio, expense ratio and combined
ratio determined in accordance with GAAP:



|               |  |                           |   |  |      |  
|-------------- |  | ------------------------- | - |  | ---- | -
|               |  | Six Months ended June 30, |  
|               |  | 2009                      |   |  | 2008 |  
|Loss ratio     |  | 67.2                      | % |  | 67.9 | %
|Expense ratio  |  | 29.3                      | % |  | 28.3 | %
|               |  |                           |   |  |      |  
|Combined ratio |  | 96.5                      | % |  | 96.2 | %
|               |  |                           |   |  |      |  

The loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums
earned. The loss ratio was affected by positive development of approximately $38 million and adverse development of approximately $17 million on prior periods loss reserves for the six-month periods ended June 30, 2009 and 2008,
respectively. Excluding the effect of prior accident years loss development, the loss ratio was 70.0% and 66.8% for the six-month periods ended June 30, 2009 and 2008, respectively. The increase in the loss ratio excluding the effect of
prior accident years loss development is primarily due to increased loss severity and lower average premiums earned per policy, partially offset by lower loss frequency.

The expense ratio is determined by matching expenses to the period over which net premiums were earned, rather than to the period that net premiums were
written. The expense ratio increased primarily due to an accrual for a reduction in workforce during the three-month period ended March 31, 2009 and the impact of the amortization of AIS deferred commissions, both of which are described below.

The combined ratio of losses and expenses is the key measure of underwriting performance traditionally used in the property and casualty
insurance industry. A combined ratio under 100% generally reflects profitable underwriting results; and a combined ratio over 100% generally reflects unprofitable underwriting results. The Companys underwriting performance contributed
approximately $47 million of income (approximately $9 million of income when excluding prior accident periods reserve development) and approximately $54 million of income (approximately $71 million of income when excluding prior accident
periods reserve development) to the Companys results of operations before income tax expense for the six-month periods ended June 30, 2009 and 2008, respectively.

To improve profitability, during the three-month period ended March 31, 2009, the Company implemented several cost reduction programs, including a
salary freeze, a suspension of the employee 401(k) matching program, and a workforce reduction of approximately 360 employees (7% of workforce) primarily located in California. As a result of the workforce reduction, an $8 million expense was
recorded ($5 million to losses and loss adjustment expenses, $3 million to other operating expenses) during the three-month period ended March 31, 2009. The annualized cost savings from these cost reduction programs are expected to be over $20
million, which began to be realized in the three-month period ended June 30, 2009.

Prior to the acquisition of AIS, the Company
deferred the recognition of commissions paid to AIS to match the earnings of the related premiums. As AIS is now a wholly-owned subsidiary, commissions paid are no longer deferrable. During the six-month period ended June 30, 2009, the
amortization of deferred commissions offset by deferrable direct sales cost impacted the statement of operations by $15 million. The Company expects no material impact after June 30, 2009.

C. Investments

The following table summarizes
the investment results of the Company:



|                                       |  |                           |           |   |      |   |           |  
|-------------------------------------- |  | ------------------------- | --------- | - | ---- | - | --------- | -
|                                       |  | Six Months ended June 30, |          
|                                       |  | 2009                      |           |   | 2008 |  
|                                       |  | (Amounts in thousands)    |          
|Average invested assets at cost (1)    |  | $                         | 3,229,138 |   |      | $ | 3,480,177 |  
|Net investment income:                 |  |                           |           |   |      |   |           |  
|Before income taxes                    |  | $                         | 74,126    |   |      | $ | 78,294    |  
|After income taxes                     |  | $                         | 65,970    |   |      | $ | 68,805    |  
|Average annual yield on investments:   |  |                           |           |   |      |   |           |  
|Before income taxes                    |  |                           | 4.6       | % |      |   | 4.5       | %
|After income taxes                     |  |                           | 4.1       | % |      |   | 4.0       | %
|Net realized investment gains (losses) |  | $                         | 181,176   |   |      | $ | (55,641   | )

| | 
| | 

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



24



---

Included in net income are net realized investment gains of $181.2 million for the six-month period ended
June 30, 2009 compared with net realized investment losses of $55.6 million for the six-month period ended June 30, 2008. Net realized investment gains include gains of $214.4 million for the six-month period ended June 30, 2009 due
to changes in the fair value of total investments measured at fair value pursuant to SFAS No. 159 compared with losses of $70.7 million for the six-month period ended June 30, 2008. The gains during the six-month period ended June 30,
2009 arise from the market value improvements on the Companys fixed maturity and equity securities. During the six-month period ended June 30, 2009, the Company recorded approximately $147.4 million and $66.9 million in gains due to
changes in the fair value of its fixed maturity portfolio and equity portfolio, respectively. The primary cause of the significant gains in the Companys equity portfolio was due to the large allocation to energy related stocks. Energy related
stocks experienced a significant growth in value more than that of the overall stock market, which saw a slight growth of approximately 1.8% in the S&P 500 Index.

The income tax expenses for the six-month periods ended June 30, 2009 and 2008 were $89.9 million and $10.4 million, respectively. The increase resulted primarily from changes in the fair value of the investment
portfolio.

III. Liquidity and Capital Resources

A. Cash Flows

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

The Company has generated positive cash flow from operations for over twenty consecutive years. Because of the Companys
long track record of positive operating cash flows, it does not attempt to match the duration and timing of asset maturities with those of liabilities. Rather, the Company manages its portfolio with a view towards maximizing total return with an
emphasis on after-tax income. With combined cash and short-term investments of $289.3 million at June 30, 2009, the Company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of
investments. However, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that the
Companys sources of funds will be sufficient to meet its liquidity needs or that the Company will not be required to raise additional funds to meet those needs, including future business expansion, through the sale of equity or debt securities
or from credit facilities with lending institutions.

Net cash provided from operating activities in the six-month period ended
June 30, 2009 was $106.4 million, an increase of $93.4 million over the corresponding period in 2008. This increase was primarily due to additional operating cash flows from AIS and a decrease in losses and loss adjustment expenses paid during
the six-month period ended June 30, 2009 compared with the corresponding period in 2008. The Company has utilized the cash provided from operating activities primarily for the development of information technology such as the NextGen and
Mercury First computer systems and the payment of dividends to its shareholders. Funds derived from the sale, redemption or maturity of fixed maturity investments of $235.0 million, were primarily reinvested by the Company in high grade fixed
maturity securities.

The following table shows the estimated fair value of fixed maturity securities at June 30, 2009 by contractual
maturity in the next five years:



|                                         |  |                        |        
|---------------------------------------- |  | ---------------------- | -------
|                                         |  | Fixed maturities      
|                                         |  | (Amounts in thousands)
|Due in one year or less                  |  | $                      | 24,177 
|Due after one year through two years     |  |                        | 22,692 
|Due after two years through three years  |  |                        | 31,258 
|Due after three years through four years |  |                        | 86,783 
|Due after four years through five years  |  |                        | 139,509
|                                         |  |                        |        
|                                         |  | $                      | 304,419
|                                         |  |                        |        

Effective January 1, 2009, the Company acquired AIS for $120 million. The acquisition was
financed by a $120 million credit facility that is secured by municipal bonds held as collateral. The credit facility calls for the collateral requirement to be greater than the loan amount. The collateral requirement is calculated as the fair
market value of the municipal bonds held as collateral multiplied by the advance rates, which vary based on the credit quality and duration of the assets held and range between 75% and 100% of the fair value of each bond. The loan matures on
January 1, 2012 with interest payable at a floating rate of LIBOR rate plus 125 basis points. In addition, the Company may be required to pay up to $34.7 million over the next two years as additional consideration for the AIS acquisition. The
Company plans to fund that portion of the purchase price, if necessary, from cash on hand and cash flow from operations. On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on the loan for a fixed rate
of 1.93%, resulting in a total fixed rate of 3.18%. The purpose of the swap is to offset the variability of cash flows resulting from the variable interest rate. The swap is not designated as a hedge. Changes in the fair value are adjusted through
the consolidated statement of operations in the period of change.



25



---

B. Invested Assets

Portfolio Composition

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

The following table sets forth the composition of the total investment portfolio of the Company at
June 30, 2009 and December 31, 2008:



|                                                  |  |                        |           |                   |   |           |  |            |           |  |   |          
|------------------------------------------------- |  | ---------------------- | --------- | ----------------- | - | --------- |  | ---------- | --------- |  | - | ---------
|                                                  |  | June 30, 2009          |           | December 31, 2008
|                                                  |  | Cost (1)               |           | Fair Value        |   | Cost (1)  |  | Fair Value
|                                                  |  | (Amounts in thousands)
|Fixed maturity securities:                        |  |                        |           |                   |   |           |  |            |           |  |   |          
|U.S. government bonds and agencies                |  | $                      | 9,922     |                   | $ | 10,099    |  | $          | 9,633     |  | $ | 9,898    
|States, municipalities and political subdivisions |  |                        | 2,409,548 |                   |   | 2,346,427 |  |            | 2,370,879 |  |   | 2,187,668
|Mortgage-backed securities                        |  |                        | 162,166   |                   |   | 148,167   |  |            | 216,483   |  |   | 202,326  
|Corporate securities                              |  |                        | 93,251    |                   |   | 86,281    |  |            | 77,097    |  |   | 65,727   
|Redeemable preferred stock                        |  |                        | 49,288    |                   |   | 33,838    |  |            | 54,379    |  |   | 16,054   
|                                                  |  |                        |           |                   |   |           |  |            |           |  |   |          
|                                                  |  |                        | 2,724,175 |                   |   | 2,624,812 |  |            | 2,728,471 |  |   | 2,481,673
|                                                  |  |                        |           |                   |   |           |  |            |           |  |   |          
|Equity securities:                                |  |                        |           |                   |   |           |  |            |           |  |   |          
|Common stock:                                     |  |                        |           |                   |   |           |  |            |           |  |   |          
|Public utilities                                  |  |                        | 30,223    |                   |   | 35,726    |  |            | 32,293    |  |   | 39,148   
|Banks, trusts and insurance companies             |  |                        | 19,316    |                   |   | 13,291    |  |            | 20,451    |  |   | 11,328   
|Industrial and other                              |  |                        | 277,747   |                   |   | 197,922   |  |            | 330,030   |  |   | 186,294  
|Non-redeemable preferred stock                    |  |                        | 20,999    |                   |   | 11,874    |  |            | 20,999    |  |   | 10,621   
|                                                  |  |                        |           |                   |   |           |  |            |           |  |   |          
|                                                  |  |                        | 348,285   |                   |   | 258,813   |  |            | 403,773   |  |   | 247,391  
|                                                  |  |                        |           |                   |   |           |  |            |           |  |   |          
|Short-term investments                            |  |                        | 94,574    |                   |   | 94,557    |  |            | 208,278   |  |   | 204,756  
|                                                  |  |                        |           |                   |   |           |  |            |           |  |   |          
|Total investments                                 |  | $                      | 3,167,034 |                   | $ | 2,978,182 |  |            | 3,340,522 |  |   | 2,933,820
|                                                  |  |                        |           |                   |   |           |  |            |           |  |   |          

| | 
| | 

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

At June 30, 2009, approximately 78.6% of the Companys total investment portfolio at fair value and 89.1% of its total fixed maturity investments at fair value were invested in tax-exempt state and municipal
bonds. Shorter duration redeemable preferred stocks and collateralized mortgage obligations together represented 6.1% of the Companys total investment portfolio at fair value. Equity holdings consist of perpetual preferred stocks and
dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion. At June 30, 2009, short-term investments consisted of highly rated short-duration securities redeemable on a daily or
weekly basis. The Company does not have any material direct equity investment in subprime lenders.

During the six-month period ended
June 30, 2009, the Company recognized approximately $181.2 million in net realized investment gains, which include approximately $148.2 million and $26.6 million related to fixed maturity securities and equity securities, respectively. Included
in the gains were $147.4 million and $66.9 million in gains due to changes in the fair value of the Companys fixed maturity portfolio and equity security portfolio, respectively, measured at fair value pursuant to SFAS No. 159. Partially
offsetting the gain due to changes in the fair value of the Companys equity security portfolio was approximately $40.6 million in loss from the sale of equity securities.



26



---

Fixed maturity securities

Fixed maturity securities include debt securities and redeemable preferred stocks, which may have fixed or variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of
the Companys asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs, tax planning considerations or other economic factors. A primary exposure for the
fixed maturity securities is interest rate risk. The longer the duration, the more sensitive the asset is to market interest rate fluctuations. As assets with longer maturity dates tend to produce higher current yields, the Companys historical
investment philosophy resulted in a portfolio with a moderate duration. The nominal average maturity of the overall bond portfolio, including short-term investments, was 12.9 years at June 30, 2009, which reflects a portfolio heavily weighted
in investment grade tax-exempt municipal bonds. Fixed maturity investments purchased by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline. The call-adjusted average maturity of
the overall bond portfolio, including short-term investments, was approximately 8.8 years, related to holdings which are heavily weighted with high coupon issues that are expected to be called prior to maturity. The modified duration of the overall
bond portfolio reflecting anticipated early calls was 6.1 years at June 30, 2009, including collateralized mortgage obligations with modified durations of approximately 1.6 years and short-term investments that carry no duration. Modified
duration measures the length of time it takes, on average, to receive the present value of all the cash flows produced by a bond, including reinvestment of interest. As it measures four factors (maturity, coupon rate, yield and call terms), which
determine sensitivity to changes in interest rates; modified duration is considered a better indicator of price volatility than simple maturity alone.

Another exposure related to the fixed maturity securities is credit risk, which is managed by maintaining a weighted-average portfolio credit quality rating of AA-. To calculate the weighted-average credit quality
ratings as disclosed throughout this Form 10-Q, individual securities were weighted based on fair value and a credit quality numeric score that was assigned to each rating grade. Bond holdings are broadly diversified geographically, within the
tax-exempt sector. Holdings in the taxable sector consist principally of investment grade issues. At June 30, 2009, bond holdings rated below investment grade and non rated bonds totaled $107.3 million and $39.7 million, respectively, at fair
value, and represented approximately 4.1% and 1.5%, respectively, of total fixed maturity securities. At December 31, 2008, bond holdings of lower than investment grade and non rated bonds totaled $55.4 million and $49.5 million, respectively,
and represented approximately 2.2% and 2.0%, respectively, of total fixed maturity securities.

The following table presents the credit
quality rating of the Companys fixed maturity portfolio by types of security at June 30, 2009 at fair value. Credit quality ratings are based on the average of ratings assigned by nationally recognized securities rating organizations.
Credit ratings for the Companys fixed maturity portfolio were stable during the six-month period ended June 30, 2009, with 72.0% of fixed maturity securities at fair value experiencing no change in their overall rating. Approximately
26.0% experienced downgrades during the period, offset by approximately 2.0% in credit upgrades. The majority of the downgrades were due to continued downgrading of the monoline insurance carried on much of the municipal holdings. The
majority of the downgrades was slight and still within the investment grade portfolio and only approximately $14.7 million at fair value was downgraded to below investment grade during the quarter, allowing the Company to maintain a high overall
credit rating on its fixed maturity securities.



27



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|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|----------------------------------- |  | ---------------------- | ------- | - | -- | - | ------- | - |  | - | ------- | - |  | --------------- | ------- | - | ----- | - | ------- | - |  | - | --------- | -
|                                    |  | June 30, 2009          |         |   |    |  
|                                    |  | AAA                    |         |   | AA |   |         | A |  |   | BBB     |   |  | Non Rated/Other |         |   | Total |  
|                                    |  | (Amounts in thousands) |         |   |    |  
|U.S. government bonds and agencies: |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Treasuries                          |  | $                      | 6,826   |   |    | $ |        |   |  | $ |        |   |  | $               |        |   |       | $ |        |   |  | $ | 6,826     |  
|Government agency                   |  |                        | 3,273   |   |    |   |        |   |  |   |        |   |  |                 |        |   |       |   |        |   |  |   | 3,273     |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Total                               |  |                        | 10,099  |   |    |   |        |   |  |   |        |   |  |                 |        |   |       |   |        |   |  |   | 10,099    |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|                                    |  |                        | 100.0   | % |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   | 100.0     | %
|Municipal securities:               |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Insured (1)                         |  |                        | 2,220   |   |    |   | 541,213 |   |  |   | 652,359 |   |  |                 | 98,643  |   |       |   | 27,485  |   |  |   | 1,321,920 |  
|Uninsured                           |  |                        | 291,199 |   |    |   | 326,431 |   |  |   | 196,599 |   |  |                 | 154,516 |   |       |   | 55,762  |   |  |   | 1,024,507 |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Total                               |  |                        | 293,419 |   |    |   | 867,644 |   |  |   | 848,958 |   |  |                 | 253,159 |   |       |   | 83,247  |   |  |   | 2,346,427 |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|                                    |  |                        | 12.5    | % |    |   | 37.0    | % |  |   | 36.2    | % |  |                 | 10.8    | % |       |   | 3.5     | % |  |   | 100.0     | %
|Mortgage-backed securities:         |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Agencies                            |  |                        | 113,843 |   |    |   |        |   |  |   |        |   |  |                 |        |   |       |   |        |   |  |   | 113,843   |  
|Non-agencies:                       |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Prime                               |  |                        | 10,495  |   |    |   | 714     |   |  |   | 611     |   |  |                 | 3,055   |   |       |   | 4,326   |   |  |   | 19,201    |  
|Alt-A                               |  |                        | 2,998   |   |    |   | 5,834   |   |  |   | 1,545   |   |  |                 | 2,293   |   |       |   | 2,453   |   |  |   | 15,123    |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Total                               |  |                        | 127,336 |   |    |   | 6,548   |   |  |   | 2,156   |   |  |                 | 5,348   |   |       |   | 6,779   |   |  |   | 148,167   |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|                                    |  |                        | 85.9    | % |    |   | 4.4     | % |  |   | 1.5     | % |  |                 | 3.6     | % |       |   | 4.6     | % |  |   | 100.0     | %
|Corporate securities:               |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Financial                           |  |                        | 4,401   |   |    |   | 11,022  |   |  |   | 16,720  |   |  |                 | 11,902  |   |       |   | 12,176  |   |  |   | 56,221    |  
|Energy                              |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 | 5,660   |   |       |   | 8,874   |   |  |   | 14,534    |  
|Communications                      |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 | 6,268   |   |       |   |        |   |  |   | 6,268     |  
|Utilities                           |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 | 3,490   |   |       |   | 2,089   |   |  |   | 5,579     |  
|Basic materials                     |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 | 3,624   |   |       |   |        |   |  |   | 3,624     |  
|Consumer - cyclical                 |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 |        |   |       |   | 55      |   |  |   | 55        |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Total                               |  |                        | 4,401   |   |    |   | 11,022  |   |  |   | 16,720  |   |  |                 | 30,944  |   |       |   | 23,194  |   |  |   | 86,281    |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|                                    |  |                        | 5.1     | % |    |   | 12.7    | % |  |   | 19.4    | % |  |                 | 35.9    | % |       |   | 26.9    | % |  |   | 100.0     | %
|Redeemable preferred stock:         |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Corporate - Hybrid (CDO)            |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 |        |   |       |   | 33,394  |   |  |   | 33,394    |  
|Redeemable preferred stock          |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 |        |   |       |   | 444     |   |  |   | 444       |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|Total                               |  |                        |        |   |    |   |        |   |  |   |        |   |  |                 |        |   |       |   | 33,838  |   |  |   | 33,838    |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   | 100.0   | % |  |   | 100.0     | %
|                                    |  |                        |         |   |    |  
|Total                               |  | $                      | 435,255 |   |    | $ | 885,214 |   |  | $ | 867,834 |   |  | $               | 289,451 |   |       | $ | 147,058 |   |  | $ | 2,624,812 |  
|                                    |  |                        |         |   |    |   |         |   |  |   |         |   |  |                 |         |   |       |   |         |   |  |   |           |  
|                                    |  |                        | 16.6    | % |    |   | 33.7    | % |  |   | 33.1    | % |  |                 | 11.0    | % |       |   | 5.6     | % |  |   | 100.0     | %



|(1) | Insured municipal bonds based on underlying ratings: AAA: $11,111, AA: $368,288, A: $650,861, BBB: $104,136, Non rated/Other: $187,524
|--- | --------------------------------------------------------------------------------------------------------------------------------------



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1. Municipal securities

The Company had approximately $2.3 billion at fair value ($2.4 billion at amortized cost) in municipal bonds at June 30, 2009, with an unrealized loss of $63.1 million which represents 63.5% of the unrealized
losses in the entire fixed maturity portfolio. Approximately half of the municipal bond positions are insured by bond insurers. For insured municipal bonds that have underlying ratings, the weighted-average rating was AA- at June 30, 2009.

The following table shows the Companys insured municipal bond portfolio by bond insurer at June 30, 2009 and at
December 31, 2008.



|                       |  |                        |  |                   |           |            |     |            |   |          
|---------------------- |  | ---------------------- |  | ----------------- | --------- | ---------- | --- | ---------- | - | ---------
|                       |  | June 30, 2009          |  | December 31, 2008
|Municipal bond insurer |  | Rating (1)             |  | Fair value        |           | Rating (1) |     | Fair value
|                       |  | (Amounts in thousands)
|MBIA                   |  | BBB                    |  | $                 | 677,963   |            | BBB |            | $ | 606,301  
|AMBAC (2)              |  | BB                     |  |                   | 215,380   |            | BBB |            |   | 193,701  
|FSA                    |  | AA                     |  |                   | 213,062   |            | AA  |            |   | 205,249  
|ASSURED GTY            |  | AA                     |  |                   | 40,927    |            | AA  |            |   | 16,664   
|XLCA                   |  | CC                     |  |                   | 40,621    |            | CCC |            |   | 38,393   
|CIFG                   |  | CCC                    |  |                   | 16,441    |            | B   |            |   | 16,278   
|ACA                    |  | NR                     |  |                   | 14,365    |            | NR  |            |   | 13,899   
|RADIAN                 |  | BB                     |  |                   | 14,265    |            | BBB |            |   | 15,155   
|FGIC                   |  | NR                     |  |                   | 5,098     |            | CCC |            |   | 9,048    
|Other                  |  | N/A                    |  |                   | 83,798    |            | N/A |            |   | 81,283   
|                       |  |                        |  |                   |           |            |     |            |   |          
|                       |  |                        |  | $                 | 1,321,920 |            |     |            | $ | 1,195,971
|                       |  |                        |  |                   |           |            |     |            |   |          

| | 
| | 

| | (1) | Managements estimate of average of ratings issued by Standard & Poors, Moodys and Fitch.
| | --- | -------------------------------------------------------------------------------------------



| | (2) | Downgraded to CC subsequent to June 30, 2009.
| | --- | ---------------------------------------------

The
Company considers the strength of the underlying credit as a buffer against potential market value declines which may result from future rating downgrades of the bond insurers. In addition, the Company has a long-term time horizon for its municipal
bond holdings which generally allows it to recover the full principal amounts upon maturity, avoiding forced sales prior to maturity, of bonds that have declined in market value due to the bond insurers rating downgrades. Based on the
uncertainty surrounding the financial condition of these insurers, it is possible that there will be additional downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair
value of municipal bonds.

At June 30, 2009, municipal securities included auction rate securities. The Company owned $2.9 million and
$3.0 million at fair value of auction rate securities at June 30, 2009 and December 31, 2008, respectively. Auction rate securities were valued based on a discounted cash flow model with certain inputs that were not observable in the
market, to which SFAS No. 157 refers as Level 3 inputs.

2. Mortgage-backed securities

The mortgage-backed securities portfolio is categorized as loans to prime borrowers except for approximately $15.1 million and $16.3 million
($19.7 million and $20.0 million amortized cost) of Alt-A mortgages at June 30, 2009 and December 31, 2008, respectively. Alt-A mortgage backed securities are at fixed or variable rates and include certain securities that are
collateralized by residential mortgage loans issued to borrowers with stronger credit profiles than sub-prime borrowers, but do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation. At
June 30, 2009, the Company had no holdings in commercial mortgage-backed securities.

The weighted-average rating of the
Companys Alt-A mortgages is A and the weighted-average rating of the entire mortgage backed securities portfolio is AA+.

3. Corporate
securities

Included in the fixed maturity securities are $86.3 million of fixed rated corporate securities which have a duration of
4.8 years and a weighted-average rating of BBB+.



29



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4. Redeemable preferred stock

Included in fixed maturities securities are redeemable preferred stocks, which represent approximately 1% of the total investment portfolio at June 30, 2009, and had a weighted-average rating of less than
investment grade.

Equity securities

Equity holdings consist of non-redeemable preferred stocks and common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion. The net gain due to changes in fair value of the Companys equity
portfolio during the six-month period ended June 30, 2009 was $66.9 million. The primary cause of the significant gains in the Companys equity portfolio was due to the large allocation to energy related stocks. During the six-month period
ended June 30, 2009, energy related stocks experienced a significant growth in value more than that of the overall stock market, which saw a slight growth of approximately 1.8% in the S&P 500 Index.

The Companys common stock allocation is intended to enhance the return of and provide diversification for the total portfolio. At June 30,
2009, 8.7% of the total investment portfolio at fair value was held in equity securities, compared to 8.4% at December 31, 2008.

Short-term
investments

At June 30, 2009, short-term investments include money market accounts, options, and short-term bonds which are highly
rated short duration securities redeemable on a daily or weekly basis.

C. Regulatory Capital Requirement

Industry and regulatory guidelines suggest that the ratio of a property and casualty insurers annual net premiums written to statutory
policyholders surplus should not exceed 3.0 to 1. Based on the combined surplus of all the Insurance Companies of $1.4 billion at June 30, 2009, and net premiums written for the twelve months ended on that date of $2.6 billion, the ratio
of premium writings to surplus was 1.9 to 1.

IV. Regulatory and Litigation Matters

The Department of Insurance (DOI) in each state in which the Company operates conducts periodic financial and market conduct examinations of
the Companys insurance subsidiaries domiciled within the respective state. The following table provides a summary of current financial and market conduct examinations:



|      |  |                       |  |                       |  |                                                      
|----- |  | --------------------- |  | --------------------- |  | -----------------------------------------------------
|State |  | Exam Type             |  | Period Under Review   |  | Status                                               
|CA    |  | Rating & Underwriting |  | 2004 to 2007          |  | Field work has been completed. Awaiting final report.
|NJ    |  | Market Conduct        |  | Sept 2007 to Aug 2008 |  | Field work has been completed. Awaiting final report.
|OK    |  | Financial             |  | 2005 to 2007          |  | Report was issued in May 2009                        
|FL    |  | Market Conduct        |  | Sept 2005 to Dec 2006 |  | Report was issued in June 2009                       
|TX    |  | Financial             |  | 2005 to 2008          |  | Data submitted and field work is pending.            

No material findings have been noted in the examinations above.

In March 2006, the California DOI issued an Amended Notice of Non-Compliance (NNC) to the NNC originally issued in February 2004 alleging
that the Company charged rates in violation of the California Insurance Code, willfully permitted its agents to charge broker fees in violation of California law, and willfully misrepresented the actual price insurance consumers could expect to pay
for insurance by the amount of a fee charged by the consumers insurance broker. Through this action, the California DOI seeks to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee, which the
California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the California DOI seeks to impose a penalty for each and every date on which the Company allegedly used a misleading advertisement alleged in the NNC.
Finally, based upon the conduct alleged, the California DOI also contends that the Company acted fraudulently in violation of Section 704(a) of the California Insurance Code, which permits the California Commissioner of Insurance to suspend
certificates of authority for a period of one year. The Company filed a Notice of Defense in response to the NNC. The Company does not believe that it has done anything to warrant a monetary penalty from the California DOI. The San Francisco
Superior Court, in Robert Krumme, On Behalf Of The General Public v. Mercury Insurance Company, Mercury Casualty Company, and California Automobile Insurance Company, denied plaintiffs requests for restitution or any other form of
retrospective monetary relief based on the same facts and legal theory. A hearing before the administrative law judge has been set to start on September 14, 2009.

The Company is, from time to time, named as a defendant in various lawsuits incidental to its insurance business. In most of these actions, plaintiffs assert claims for punitive damages which are not insurable under
judicial decisions. The Company has established reserves for lawsuits in which the Company is able to estimate its potential exposure and the likelihood that the court will



30



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rule against the Company is probable. The Company vigorously defends these actions, unless a reasonable settlement appears appropriate. An unfavorable ruling
against the Company in the actions currently pending may, but is not likely to, have a material impact on the Companys quarterly results of operations; however, it is not expected to be material to the Companys financial position. For a
further discussion of the Companys pending material regulatory matters and litigation, see the Companys Annual Report on Form 10-K for the year ended December 31, 2008.

V. Critical Accounting Policies and Estimates

A. Reserves

The preparation of the Companys consolidated financial statements requires judgment and estimates. The most significant is the estimate of loss
reserves as required by SFAS No. 60, Accounting and Reporting by Insurance Enterprises (SFAS No. 60), and SFAS No. 5, Accounting for Contingencies (SFAS No. 5). Estimating loss
reserves is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the reserve that is required. Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of
repair materials and labor rates, among other factors, can all impact ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement
of a claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably predictable than long-tail liability claims.

The Company also engages independent actuarial consultants to review the Companys reserves and to provide the annual actuarial opinions required
under state statutory accounting requirements. The Company does not rely on actuarial consultants for GAAP reporting or periodic report disclosure purposes. The Company analyzes loss reserves quarterly primarily using the incurred loss development,
average severity and claim count development methods described below. The Company also uses the paid loss development method to analyze loss adjustment expense reserves and industry claims data as part of its reserve analysis. When deciding which
method to use in estimating its reserves, the Company evaluates the credibility of each method based on the maturity of the data available and the claims settlement practices for each particular line of business or coverage within a line of
business. When establishing the reserve, the Company will generally analyze the results from all of the methods used rather than relying on one method. While these methods are designed to determine the ultimate losses on claims under the
Companys policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes. The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.

The incurred loss development method analyzes historical incurred case loss (case reserves plus paid losses) development to estimate ultimate losses.
The Company applies development factors against current case incurred losses by accident period to calculate ultimate expected losses. The Company believes that the incurred loss development method provides a reasonable basis for evaluating ultimate
losses, particularly in the Companys larger, more established lines of business which have a long operating history. The 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 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 coupled with the claim count development method
provide meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing reserves. The paid loss development method analyzes historical payment patterns to estimate the amount of losses yet to be
paid. The Company primarily uses this method for loss adjustment expenses because specific case reserves are generally not established for loss adjustment expenses.

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

At June 30, 2009, the Company
recorded its point estimate of approximately $1,070.0 million in losses and loss adjustment expenses liability which includes approximately $373.6 million of incurred but not reported (IBNR) loss reserves. IBNR includes estimates, based
upon past experience, of ultimate developed costs which may differ from case estimates, unreported claims which occurred on or prior to June 30, 2009 and estimated future payments for reopened claims. Management believes that the liability
for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date; however, since the provisions are necessarily based upon estimates, the ultimate liability may be more or
less than such provision.



31



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The Company evaluates its reserves quarterly. When management determines that the estimated ultimate
claim cost requires reduction for previously reported accident years, positive development occurs and a reduction in losses and loss adjustment expenses is reported in the current period. If the estimated ultimate claim cost requires an increase for
previously reported accident years, negative development occurs and an increase in losses and loss adjustment expenses is reported in the current period. For the six-month period ended June 30, 2009, the Company reported positive development of
approximately $38 million on the 2008 and prior accident years loss and loss adjustment expense reserves which at December 31, 2008 totaled approximately $1.1 billion. The positive loss development was almost entirely from the California
operations and resulted primarily from decreases in the personal automobile loss severity estimates for the 2008 and 2007 accident years and fewer late reported claims than originally anticipated for the 2008 accident year.

For a further discussion of the Companys reserving methods, see the Companys Annual Report on Form 10-K for the year ended December 31,
2008.

B. Premiums

The Company
complies with SFAS No. 60 in recognizing revenue on insurance policies written. The Companys insurance premiums are recognized as income ratably over the term of the policies, that is, in proportion to the amount of insurance protection
provided. Unearned premiums are carried as a liability on the balance sheet and are computed on a monthly pro-rata basis. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs,
unamortized acquisition costs and maintenance costs to related unearned premiums, net of investment income. To the extent that any of the Companys lines of business become substantially unprofitable, a premium deficiency reserve may be
required. The Company does not expect this to occur on any of its significant lines of business.

C. Investments

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

D. Fair Value of Financial Instruments

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

The Companys financial instruments include securities issued by the U.S. government and its agencies, securities issued by states and municipalities, certain corporate and other debt securities, corporate equity securities, and
exchange traded funds. Over 99% of the fair value of the financial instruments held at June 30, 2009 is based on observable market prices, observable market parameters, or is derived from such prices or parameters. The availability of
observable market prices and pricing parameters can vary across different financial instruments. Observable market prices and pricing parameters in a financial instrument, or a related financial instrument, are used to derive a price without
requiring significant judgment.

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



32



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E. Income Taxes

At June 30, 2009, the Companys deferred income taxes were in a net asset position primarily as a result of the fair value declines in the investment portfolio in recent months, which resulted from extreme
volatility in the capital markets and a widening of credit spreads beyond historic norms. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely
than not to be realized, a valuation allowance is established.

Managements recoverability assessment is based on estimates of
anticipated capital gains, available capital gains realized in prior years that could be utilized through carryback, and tax-planning strategies available to generate future taxable capital gains, all of which would contribute to the realization of
deferred tax benefits. The Company expects to hold certain quantities of debt securities, which are currently in loss positions, to recovery or maturity. Management believes unrealized losses related to these debt securities, which represent a
significant portion of the unrealized loss positions at year-end, are not due to default risk. Thus, the principal amounts are believed to be fully realizable at maturity. The Company has a long-term horizon for holding these securities, which
management believes will allow avoidance of forced sales prior to maturity. The Company has prior years realized capital gains available to offset realized capital losses, via the filing of carryback refund claims. The Company also has
unrealized gains in its investment portfolio which could be realized through asset dispositions, at managements discretion. Further, the Company has the capability to generate additional realized capital gains by entering into a sale-leaseback
transaction using one or more properties of its appreciated real estate holdings. Finally, the Company has an established history of generating capital gain premiums earned through its common stock call option program. Based on the continued
existence of the options market, the substantial amount of capital committed to supporting the call option program, and the Companys favorable track record in generating net capital gains from this program in both upward and downward markets,
management believes it will be able to generate sufficient amounts of option premium capital gains (more than sufficient to offset any losses on the underlying stocks employed in the program) on a consistent, long term basis.

The Company has the capability to implement these strategies as it has a steady history of generating positive cash flow from operations, as well as the
reasonable expectation that its cash flow needs can be met in future periods without the forced sale of its investments. This capability will enable management to use its discretion in controlling the timing and amount of realized losses it
generates during future periods. By prudent utilization of some or all of these actions, management believes that it has the ability and intent to generate capital gains, and minimize tax losses, in a manner sufficient to avoid losing the full
benefits of its deferred tax assets. Thus, as a result of the Companys strategies and an improvement in the fair values of our investments, a $2.2 million valuation allowance recognized at March 31, 2009 was reversed at June 30,
2009. Management will continue to assess the need for a valuation allowance on a quarterly basis. Although realization is not assured, management believes it is more likely than not that the Companys deferred tax assets will be realized.

F. Goodwill

Goodwill
represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. The Company annually evaluates goodwill for impairment using widely accepted valuation techniques to estimate the fair value of its
reporting units. The Company also reviews its goodwill for impairment whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill may exceed its implied fair value.

G. Contingent Liabilities

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

VI. Forward-Looking Statements

Certain statements in
this report on Form 10-Q that are not historical facts constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements may address, among other things, the Companys strategy for growth, business development, regulatory approvals, market position, expenditures, financial results and reserves. Forward-looking
statements are not guarantees of performance and are subject to important factors and events that could cause the Companys actual business, prospects and results of operations to differ materially from the historical information contained in
this Form 10-Q and from those that may be expressed or implied by the forward-looking statements.



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

The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new
information or future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-Q or, in the case of any document the Company incorporates by
reference, the date of that document. Investors also should understand that it is not possible to predict or identify all factors and should not consider the risks set forth above to be a complete statement of all potential risks and
uncertainties. If the expectations or assumptions underlying the Companys forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those predicted in any forward-looking
statements. The factors identified above are believed to be some, but not all, of the important factors that could cause actual events and results to be significantly different from those that may be expressed or implied in any forward-looking
statements. Any forward-looking statements should also be considered in light of the information provided in Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 and in
Item 1A. Risk Factors in Part II - Other Information of this Quarterly Report on Form 10-Q.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

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

Overview

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

The Company manages exposures to market risk
through the use of asset allocation, duration and credit ratings. Asset allocation limits place restrictions on the total funds that may be invested within an asset class. Duration limits on the fixed maturities portfolio place restrictions on the
amount of interest rate risk that may be taken. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries
established by investment policies.

Credit risk

Credit risk is risk due to uncertainty in a counterpartys ability to meet its obligations. Credit risk is managed by maintaining a weighted-average fixed maturities portfolio credit quality rating of AA-.
Historically, the ten-year default rate per Moodys for AA rated municipal bonds has been less than 1%. The Companys municipal bond holdings, which represent 89.4% of its fixed maturity portfolio at June 30, 2009 at fair value, are
broadly diversified geographically and of those approximately 99.7% are in the tax-exempt sector. The largest holdings are in populous states such as Texas (16.3%) and California (12.1%); however, such holdings are further diversified primarily
between cities, counties, schools, public works, hospitals and state general obligations. In California, the Company owns approximately $7.6 million at fair value of general obligations of the state at June 30, 2009. Credit risk is
addressed



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by limiting exposure to any particular issuer to ensure diversification. Taxable fixed maturity securities represent 10.9% of the Companys fixed
maturity portfolio. Approximately 43.5% of the Companys taxable fixed maturity securities were comprised of U.S. government bonds and agencies, which were rated AAA at June 30, 2009. Approximately 18.6% of the Companys taxable
fixed maturity securities were rated below investment grade. Below investment grade issues are considered watch list items by the Company, and their status is evaluated within the context of the Companys overall portfolio and
its investment policy on an aggregate risk management basis, as well as its ability to recover its investment on an individual issue basis.

Credit ratings for the Companys fixed maturity portfolio were stable during the six-month period ended June 30, 2009, with 72.0% of the fixed maturity portfolio at fair value experiencing no change in their overall
rating. Approximately 26.0% experienced downgrades during the period, offset by approximately 2.0% in credit upgrades. The majority of the downgrades were due to continued downgrading of the monoline insurance carried on much of the
municipal holdings. The majority of the downgrades was slight and still within the investment grade portfolio and only approximately $14.7 million at fair value was downgraded to below investment grade during the quarter, allowing the Company
to maintain a high overall credit rating on its fixed maturity securities.

Equity price risk

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

At June 30, 2009, the Companys primary objective for common equity investments is current income. The fair value of the equity investment
consists of $246.9 million in common stocks and $11.9 million in non-redeemable preferred stocks. The common stock equity assets are typically valued for future economic prospects as perceived by the market. The current market expectation is
cautiously optimistic following government programs designed to sustain the economy. The Company has also allocated more to the energy sector relative to the S&P 500 Index to hedge against potential inflationary pressures on the equity
markets possible in a sudden economic recovery.

The common equity portfolio represents approximately 8.3% of total investments at fair
value. Beta is a measure of a securitys systematic (non-diversifiable) risk, which is the percentage change in an individual securitys return for a 1% change in the return of the market. The weighted-average Beta for the Companys
common stock holdings was 1.15 at June 30, 2009. Based on a hypothetical 25% or 50% reduction in the overall value of the stock market, the fair value of the common stock portfolio would decrease by approximately $71.0 million or $142.0
million, respectively.

Interest rate risk

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

The value of the fixed maturity portfolio, which represents 88.1% of total investments at fair value, is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases and vice versa. A common measure
of the interest sensitivity of fixed maturity assets is modified duration, a calculation that utilizes maturity, coupon rate, yield and call terms to calculate an average age of the expected cash flows. The longer the duration, the more sensitive
the asset is to market interest rate fluctuations.

The Company has historically invested in fixed maturity investments with a goal towards
maximizing after-tax yields and holding assets to the maturity or call date. Since assets with longer maturity dates tend to produce higher current yields, the Companys historical investment philosophy resulted in a portfolio with a moderate
duration. Bond investments made by the Company typically have call options attached, which further reduce the duration of the asset as interest rates decline. The increase in municipal bond credit spreads in 2008 caused overall interest rates to
increase, which resulted in the increase in the duration of the Companys portfolio. Consequently, the modified duration of the bond portfolio, including short-term investments, is 6.1 years at June 30, 2009. Given a hypothetical parallel
increase of 100 basis or 200 basis points in interest rates, the fair value of the bond portfolio at June 30, 2009 would decrease by approximately $160.4 million or $320.8 million, respectively.

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



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|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls
and Procedures

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

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

Changes in Internal Control over Financial Reporting

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



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PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The Company is, from time to
time, named as a defendant in various lawsuits incidental to its insurance business. In most of these actions, plaintiffs assert claims for punitive damages which are not insurable under judicial decisions. The Company has established reserves for
lawsuits in which the Company is able to estimate its potential exposure and the likelihood that the court will rule against the Company is probable. The Company vigorously defends these actions, unless a reasonable settlement appears
appropriate. An unfavorable ruling against the Company in the actions currently pending may have a material impact on the Companys quarterly results of operations; however, none is expected to be material to the Companys financial
position. For a detailed description of the pending material lawsuits, see the Companys Annual Report on Form 10-K for the year ended December 31, 2008.



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

The Companys business,
operations, and financial position are subject to various risks. These risks are described elsewhere in this report and in its other filings with the United States Securities and Exchange Commission, including the Companys Annual Report on
Form 10-K for the year ended December 31, 2008. The risk factors identified in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 have not changed in any material respect.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



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

The Company held its Annual Meeting of Shareholders on May 13, 2009. The matters voted upon at the meeting included the election of all nine directors. The votes cast with respect to this matter were as follows:

Election of Directors:



|                   |  |                          |  |                        
|------------------ |  | ------------------------ |  | -----------------------
|Nominee            |  | Number ofShares VotedFor |  | Number ofSharesWithheld
|Nathan Bessin      |  | 40,227,756               |  | 2,916,884              
|Bruce A. Bunner    |  | 42,201,328               |  | 943,312                
|Michael D. Curtius |  | 42,202,553               |  | 942,087                
|Richard E. Grayson |  | 42,074,469               |  | 1,070,171              
|George Joseph      |  | 42,256,963               |  | 887,677                
|Martha E. Marcon   |  | 41,946,331               |  | 1,198,309              
|Donald. P. Newell  |  | 41,946,309               |  | 1,198,331              
|Donald R. Spuehler |  | 41,957,933               |  | 1,186,706              
|Gabriel Tirador    |  | 42,209,069               |  | 935,571                



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.34 |  | Credit Agreement, dated as of January 2, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto                                                                                                                                                                                                                                                                    
|      | 
|15.1  |  | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                             
|      | 
|15.2  |  | Awareness Letter 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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.



37



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |                             |  |     |  |                                           
|-------------------- |  | --------------------------- |  | --- |  | ------------------------------------------
|                     |  | MERCURY GENERAL CORPORATION
|                     |  |                             | 
|Date: August 4, 2009 |  |                             |  | By: |  | /s/    Gabriel Tirador                    
|                     |  |                             |  |     |  | Gabriel Tirador                           
|                     |  |                             |  |     |  | President and Chief Executive Officer     
|                     |  |                             | 
|Date: August 4, 2009 |  |                             |  | By: |  | /s/    Theodore Stalick                   
|                     |  |                             |  |     |  | Theodore Stalick                          
|                     |  |                             |  |     |  | Vice President and Chief Financial Officer



38