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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the Quarter Ended March 31, 2004



Commission File No. 0-3681



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MERCURY GENERAL
CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 95-221-1612                         
|(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



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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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



At April 23, 2004, the
Registrant had issued and outstanding an aggregate of 54,447,108 shares of its Common Stock.



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PART 1 - FINANCIAL INFORMATION



Item 1. Financial Statements



MERCURY GENERAL CORPORATION

AND
SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



Amounts expressed in thousands, except share amounts





|                                                                                                             |  |                |           |                   |   |          
|------------------------------------------------------------------------------------------------------------ |  | -------------- | --------- | ----------------- | - | ---------
|                                                                                                             |  | March 31, 2004 |           | December 31, 2003
|                                                                                                             | 
|                                                                                                             |  | (unaudited)    |           |                  
|ASSETS                                                                                                       |  |                |           |                   |   |          
|Investments:                                                                                                 |  |                |           |                   |   |          
|Fixed maturities available for sale (amortized cost $1,978,494 in 2004 and $1,856,083 in 2003)               |  | $              | 2,077,509 |                   | $ | 1,945,309
|Equity securities available for sale (cost $224,058 in 2004 and $223,113 in 2003)                            |  |                | 266,742   |                   |   | 264,393  
|Short-term cash investments, at cost, which approximates market                                              |  |                | 287,549   |                   |   | 329,812  
|                                                                                                             |  |                |           |                   |   |          
|Total investments                                                                                            |  |                | 2,631,800 |                   |   | 2,539,514
|Cash                                                                                                         |  |                | 51,220    |                   |   | 36,964   
|Receivables:                                                                                                 |  |                |           |                   |   |          
|Premiums receivable                                                                                          |  |                | 246,452   |                   |   | 231,277  
|Premium notes                                                                                                |  |                | 23,096    |                   |   | 22,620   
|Accrued investment income                                                                                    |  |                | 26,840    |                   |   | 26,585   
|Other                                                                                                        |  |                | 21,231    |                   |   | 18,612   
|                                                                                                             |  |                |           |                   |   |          
|Total receivables                                                                                            |  |                | 317,619   |                   |   | 299,094  
|Deferred policy acquisition costs                                                                            |  |                | 142,126   |                   |   | 132,059  
|Fixed assets, net                                                                                            |  |                | 81,274    |                   |   | 79,286   
|Other assets                                                                                                 |  |                | 34,600    |                   |   | 32,849   
|                                                                                                             |  |                |           |                   |   |          
|Total assets                                                                                                 |  | $              | 3,258,639 |                   | $ | 3,119,766
|                                                                                                             |  |                |           |                   |   |          
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                         |  |                |           |                   |   |          
|Losses and loss adjustment expenses                                                                          |  | $              | 805,651   |                   | $ | 797,927  
|Unearned premiums                                                                                            |  |                | 700,708   |                   |   | 663,004  
|Notes payable                                                                                                |  |                | 124,721   |                   |   | 124,714  
|Loss drafts payable                                                                                          |  |                | 79,204    |                   |   | 79,960   
|Accounts payable and accrued expenses                                                                        |  |                | 100,994   |                   |   | 99,389   
|Current income taxes                                                                                         |  |                | 24,249    |                   |   | 11,441   
|Deferred income taxes                                                                                        |  |                | 24,354    |                   |   | 17,808   
|Other liabilities                                                                                            |  |                | 86,660    |                   |   | 70,020   
|                                                                                                             |  |                |           |                   |   |          
|Total liabilities                                                                                            |  |                | 1,946,541 |                   |   | 1,864,263
|                                                                                                             |  |                |           |                   |   |          
|Commitments and contingencies                                                                                |  |                |           |                   |   |          
|Shareholders equity:                                                                                        |  |                |           |                   |   |          
|Common stock without par value or stated value.                                                              |  |                |           |                   |   |          
|Authorized 70,000,000 shares; issued and outstanding 54,447,108 shares in 2004 and 54,424,128 shares in 2003 |  |                | 58,091    |                   |   | 57,453   
|Accumulated other comprehensive income                                                                       |  |                | 92,117    |                   |   | 84,833   
|Retained earnings                                                                                            |  |                | 1,161,890 |                   |   | 1,113,217
|                                                                                                             |  |                |           |                   |   |          
|Total shareholders equity                                                                                   |  |                | 1,312,098 |                   |   | 1,255,503
|                                                                                                             |  |                |           |                   |   |          
|Total liabilities and shareholders equity                                                                   |  | $              | 3,258,639 |                   | $ | 3,119,766
|                                                                                                             |  |                |           |                   |   |          



2



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MERCURY GENERAL CORPORATION

AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME



(Unaudited)



Three Months Ended March 31,



Amounts expressed in thousands, except share and per
share data



|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                                   |  | 2004 |         | 2003 |  
|Revenues:                                                                                                                                                                                                          |  |      |         |      |   |         |  
|Earned premiums                                                                                                                                                                                                    |  | $    | 591,937 |      | $ | 500,666 |  
|Net investment income                                                                                                                                                                                              |  |      | 25,728  |      |   | 26,926  |  
|Net realized investment gains (losses)                                                                                                                                                                             |  |      | 5,674   |      |   | (759    | )
|Other                                                                                                                                                                                                              |  |      | 1,117   |      |   | 1,241   |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|Total revenues                                                                                                                                                                                                     |  |      | 624,456 |      |   | 528,074 |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|Expenses:                                                                                                                                                                                                          |  |      |         |      |   |         |  
|Incurred losses and loss adjustment expenses                                                                                                                                                                       |  |      | 371,996 |      |   | 341,546 |  
|Policy acquisition costs                                                                                                                                                                                           |  |      | 132,162 |      |   | 110,289 |  
|Other operating expenses                                                                                                                                                                                           |  |      | 23,300  |      |   | 20,751  |  
|Interest                                                                                                                                                                                                           |  |      | 713     |      |   | 717     |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|Total expenses                                                                                                                                                                                                     |  |      | 528,171 |      |   | 473,303 |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|Income before income taxes                                                                                                                                                                                         |  |      | 96,285  |      |   | 54,771  |  
|Income taxes                                                                                                                                                                                                       |  |      | 27,469  |      |   | 12,663  |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|Net income                                                                                                                                                                                                         |  | $    | 68,816  |      | $ | 42,108  |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|BASIC EARNINGS PER SHARE (weighted average shares outstanding 54,430,277 in 2004 and 54,378,897 in 2003)                                                                                                           |  | $    | 1.26    |      | $ | 0.77    |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|DILUTED EARNINGS PER SHARE (weighted average shares 54,606,916 as adjusted by 176,639 for the dilutive effect of options in 2004 and
54,489,585 as adjusted by 110,688 for the dilutive effect of options in 2003) |  | $    | 1.26    |      | $ | 0.77    |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  
|Dividends declared per share                                                                                                                                                                                       |  | $    | 0.37    |      | $ | 0.33    |  
|                                                                                                                                                                                                                   |  |      |         |      |   |         |  



3



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MERCURY GENERAL CORPORATION

AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



(Unaudited)



Three
Months Ended March 31,



Amounts expressed in thousands



|                                                                                                              |  |      |        |   |      |   |       
|------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------
|                                                                                                              |  | 2004 |        |   | 2003
|Net income                                                                                                    |  | $    | 68,816 |   |      | $ | 42,108
|Other comprehensive income, before tax:                                                                       |  |      |        |   |      |   |       
|Unrealized gains on securities:                                                                               |  |      |        |   |      |   |       
|Unrealized holding gains arising during period                                                                |  |      | 15,352 |   |      |   | 13,712
|Reclassification adjustment for net (gains) losses included in net income                                     |  |      | (4,130 | ) |      |   | 1,100 
|                                                                                                              |  |      |        |   |      |   |       
|Other comprehensive income before tax                                                                         |  |      | 11,222 |   |      |   | 14,812
|Income tax expense related to unrealized holding gains arising during period                                  |  |      | 5,383  |   |      |   | 4,803 
|Income tax (benefit) expense related to reclassification adjustment for (gains) losses included in net income |  |      | (1,445 | ) |      |   | 385   
|                                                                                                              |  |      |        |   |      |   |       
|Comprehensive income, net of tax                                                                              |  | $    | 76,100 |   |      | $ | 51,732
|                                                                                                              |  |      |        |   |      |   |       



4



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MERCURY GENERAL CORPORATION

AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited)



Three
Months Ended March 31,



Amounts expressed in thousands



|                                                                                      |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                      |  | 2004 |          |   | 2003 |  
|Cash flows from operating activities:                                                 |  |      |          |   |      |   |          |  
|Net income                                                                            |  | $    | 68,816   |   |      | $ | 42,108   |  
|Adjustments to reconcile net income to net cash provided from operating activities:   |  |      |          |   |      |   |          |  
|Depreciation                                                                          |  |      | 3,910    |   |      |   | 3,520    |  
|Net realized investment (gains) losses                                                |  |      | (5,674   | ) |      |   | 759      |  
|Bond amortization (accretion), net                                                    |  |      | 2,212    |   |      |   | (779     | )
|Increase in premiums receivable                                                       |  |      | (15,175  | ) |      |   | (14,942  | )
|Increase in premium notes receivable                                                  |  |      | (476     | ) |      |   | (616     | )
|Increase in deferred policy acquisition costs                                         |  |      | (10,067  | ) |      |   | (7,688   | )
|Increase in unpaid losses and loss adjustment expenses                                |  |      | 7,724    |   |      |   | 18,320   |  
|Increase in unearned premiums                                                         |  |      | 37,704   |   |      |   | 34,277   |  
|(Decrease) increase in loss drafts payable                                            |  |      | (756     | ) |      |   | 4,070    |  
|Increase in accounts payable and accrued expenses                                     |  |      | 1,606    |   |      |   | 939      |  
|Increase in accrued income taxes, excluding deferred tax on change in unrealized gain |  |      | 15,436   |   |      |   | 5,512    |  
|Other, net                                                                            |  |      | 9,773    |   |      |   | 15,797   |  
|                                                                                      |  |      |          |   |      |   |          |  
|Net cash provided from operating activities                                           |  |      | 115,033  |   |      |   | 101,277  |  
|                                                                                      |  |     
|Cash flows from investing activities:                                                 |  |      |          |   |      |   |          |  
|Fixed maturities available for sale:                                                  |  |      |          |   |      |   |          |  
|Purchases                                                                             |  |      | (285,516 | ) |      |   | (123,715 | )
|Sales                                                                                 |  |      | 91,118   |   |      |   | 2,440    |  
|Calls or maturities                                                                   |  |      | 75,363   |   |      |   | 64,248   |  
|Equity securities available for sale:                                                 |  |      |          |   |      |   |          |  
|Purchases                                                                             |  |      | (80,399  | ) |      |   | (24,620  | )
|Sales                                                                                 |  |      | 77,393   |   |      |   | 30,979   |  
|Increase in payable for securities                                                    |  |      | 4,439    |   |      |   | 7,289    |  
|Decrease (increase) in short-term cash investments, net                               |  |      | 42,263   |   |      |   | (29,651  | )
|Purchase of fixed assets                                                              |  |      | (5,921   | ) |      |   | (9,272   | )
|Sale of fixed assets                                                                  |  |      | 146      |   |      |   | 182      |  
|                                                                                      |  |      |          |   |      |   |          |  
|Net cash used in investing activities                                                 |  | $    | (81,114  | ) |      | $ | (82,120  | )



(Continued)



5



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MERCURY GENERAL CORPORATION

AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Continued)



|                                                                                          |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                          |  | 2004 |         |   | 2003 |  
|Cash flows from financing activities:                                                     |  |      |         |   |      |   |         |  
|Increase in notes payable                                                                 |  | $    |        |   |      | $ | 79      |  
|Dividends paid to shareholders                                                            |  |      | (20,143 | ) |      |   | (17,948 | )
|Proceeds from stock options exercised                                                     |  |      | 480     |   |      |   | 712     |  
|Net decrease in ESOP loan                                                                 |  |      |        |   |      |   | (1,000  | )
|                                                                                          |  |      |         |   |      |   |         |  
|Net cash used in financing activities                                                     |  |      | (19,663 | ) |      |   | (18,157 | )
|                                                                                          |  |      |         |   |      |   |         |  
|                                                                                          |  |     
|Net increase in cash                                                                      |  |      | 14,256  |   |      |   | 1,000   |  
|Cash:                                                                                     |  |      |         |   |      |   |         |  
|Beginning of the period                                                                   |  |      | 36,964  |   |      |   | 13,191  |  
|                                                                                          |  |      |         |   |      |   |         |  
|End of the period                                                                         |  | $    | 51,220  |   |      | $ | 14,191  |  
|                                                                                          |  |      |         |   |      |   |         |  
|Supplemental disclosures of cash flow information and non-cash financing activities:      |  |      |         |   |      |   |         |  
|Interest paid during the period                                                           |  | $    | 1,450   |   |      | $ | 1,598   |  
|Income taxes paid during the period                                                       |  | $    | 11,876  |   |      | $ | 7,054   |  
|Tax benefit realized on stock options exercised included in cash provided from operations |  | $    | 157     |   |      | $ | 87      |  



6



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MERCURY GENERAL CORPORATION & SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



1. Basis of Presentation



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (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 assumptions in the preparation of these consolidated financial statements relate to loss and loss adjustment expenses.
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, 2003).



The financial data of Mercury General Corporation
(Mercury General) and its subsidiaries (collectively, the Company), included herein have 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 March 31, 2004 and the results of operations, comprehensive income and cash flows for the periods presented have been made. Operating results and cash flows for the three months ended March 31, 2004
are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.



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



2. Investments



The Company monitors investments that have declined in fair value below net
book value and if the decline is judged to be other-than-temporary, the asset is written down to fair value in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. During the first quarter of 2004, the Company did not recognize any write downs of its investments as other than temporary declines. The Company wrote down $1.7 million ($1.1 million after tax) of its investments as other than
temporary declines during the first quarter of 2003.



7



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MERCURY GENERAL CORPORATION & SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



3. Stock Option Plan Accounting



The Company applies APB No. 25 in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized in the Consolidated Statements of Income. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition of SFAS No. 123:



|                                                                                                                                           |  |                                          |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                           |  | Quarter Ended March 31,                  |       
|                                                                                                                                           |  | 2004                                     |        |   | 2003 |  
|                                                                                                                                           |  | (Amounts in thousands, except per share) |       
|Net income, as reported                                                                                                                    |  | $                                        | 68,816 |   |      | $ | 42,108 |  
|Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax
effect |  |                                          | (127   | ) |      |   | (140   | )
|                                                                                                                                           |  |                                          |        |   |      |   |        |  
|Proforma net income                                                                                                                        |  | $                                        | 68,689 |   |      | $ | 41,968 |  
|                                                                                                                                           |  |                                          |        |   |      |   |        |  
|Earnings per share:                                                                                                                        |  |                                          |        |   |      |   |        |  
|Basic  as reported                                                                                                                        |  | $                                        | 1.26   |   |      | $ | .77    |  
|                                                                                                                                           |  |                                          |        |   |      |   |        |  
|Basic  pro forma                                                                                                                          |  | $                                        | 1.26   |   |      | $ | .77    |  
|                                                                                                                                           |  |                                          |        |   |      |   |        |  
|Diluted  as reported                                                                                                                      |  | $                                        | 1.26   |   |      | $ | .77    |  
|                                                                                                                                           |  |                                          |        |   |      |   |        |  
|Diluted  pro forma                                                                                                                        |  | $                                        | 1.26   |   |      | $ | .77    |  
|                                                                                                                                           |  |                                          |        |   |      |   |        |  



Calculations of the
fair value under the method prescribed by SFAS No. 123 were made using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003: dividend yield of 3.2 percent in 2003, expected volatility of 33.6
percent in 2003, and expected lives of 6 years in 2003. The risk-free interest rates used was 4.4 percent for options granted during 2003. No options have been granted in 2004.



8



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



General



The operating results of property and casualty insurance companies are
subject to significant fluctuations from quarter-to-quarter and from year-to-year due to the effect of competition on pricing, the frequency and severity of losses, including the effect of natural disasters on losses, general economic conditions,
the general regulatory environment in those states in which an insurer operates, state regulation of premium rates and other factors such as changes in tax laws. The 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.



The Company, as do most property and casualty insurance companies, utilizes
measurements which are standard industry-required 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
net premiums written, a non-GAAP financial measure, which represents the premiums charged on policies issued during a fiscal period less any reinsurance. This measure is not intended to replace, and should be read in conjunction with, the GAAP
financial results and is reconciled to the most directly comparable GAAP measure below in Results of Operations.



Mercury General Corporation and its subsidiaries (collectively, the Company) is headquartered in Los Angeles, California and operates
primarily as a personal automobile insurer selling policies through a network of independent agents and brokers. The Company also offers homeowners insurance, mechanical breakdown insurance, commercial and dwelling fire insurance, umbrella
insurance, commercial automobile insurance and commercial property insurance. Private passenger automobile lines of insurance accounted for approximately 88% of the Companys $630.3 million of net written premiums in 2004.



The Company operates primarily in the state of California, which was the only
state it produced business in prior to 1990. The Company has since expanded its operations into the following states: Georgia (1990), Illinois (1990), Oklahoma (1996), Texas (1996), Florida (1998), Virginia (2001), New York (2001) and New Jersey
(2003). During 2004, California accounted for approximately 79% of the Companys net premiums written compared to approximately 85% for the first quarter of 2003.



In April 2004, the Company commenced writing private passenger automobile insurance in the state of Arizona marking the
10thstate where the Company sells automobile insurance.



The Department of Insurance (DOI), in each state for which the
Company operates, conducts periodic financial examinations of the Companys insurance subsidiaries domiciled within the respective state. In 2004, the Illinois DOI and the Florida DOI issued reports on their examinations for the periods ended
December 31, 2000 and December 31, 2002, respectively. These examinations resulted in no adjustments or material findings. The California DOI, the Georgia DOI and the Florida DOI have commenced financial examinations for the periods ended December
31, 2003.



On June 25, 2003, the California State Board of
Equalization (SBE) upheld Notices of Proposed Assessment (NPAs) issued against the Company for tax years 1993 through 1996. In the NPAs, the California Franchise Tax Board (FTB) disallowed a portion of the
Companys expenses related to management services provided to its insurance company subsidiaries on grounds that such expenses were allocable to the Companys tax-deductible dividends from such subsidiaries. The total tax liability and
interest on the expenses amount to approximately $14 million (approximately $7 million tax liability plus $7 million of interest through March 31, 2004). The potential net liability, after federal tax benefit, amounts to approximately $9 million.



9



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The Company continues to believe that its deduction of the expenses related to management services
provided to its insurance company subsidiaries is meritorious and will continue to defend its position vigorously before the SBE and, if necessary, in the courts. The Company has filed a Petition for Rehearing with the SBE based both on procedural
and substantive grounds, and both the Company and the FTB have filed briefs relating to the Petition. The SBE is expected to consider the matter sometime after the second quarter of 2004.



The SBE decision on the NPAs for tax years 1993 through 1996 also resulted in a smaller disallowance of the Companys
interest expense deductions than was proposed by the FTB in those years. The Company has decided not to continue to challenge this issue and has established a small accrual for the tax liability and related interest.



As a result of the court ruling in Ceridian vs. Franchise Tax Board,
the FTB has issued NPAs for tax years 1997 through 2000 disallowing all Dividend Received Deductions (DRD) taken by the Company for those tax years. The ruling in Ceridian vs. Franchise Tax Boardheld a statute permitting the tax
deductibility of dividends received from wholly-owned insurance subsidiaries unconstitutional because it discriminated against out-of-state holding companies. The FTB interpretation of the ruling concludes that the discriminatory sections of the
statute are not severable and the entire statute is invalid. As a result, the FTBs position in the NPAs is that all dividends received by the Company from its insurance company subsidiaries are subject to California franchise taxes. The DRD
disallowance could result in approximately $17 million of additional California state franchise taxes plus $8 million of related interest through March 31, 2004. The potential net liability, after federal tax benefit, amounts to approximately $16
million.



The Company intends to vigorously challenge these
potential tax liabilities on 2001 and future inter-company dividends. However, if the Companys challenges are ineffective or the issue is not resolved favorably with the State of California, additional state taxes of approximately 9% (6% after
the federal tax benefit of deducting state taxes) could be owed on dividends Mercury General receives from its insurance subsidiaries. While the Company intends to continue paying dividends to its shareholders, an unsatisfactory conclusion to the
inter-company dividend issue could affect future dividend policy.



The Company is closely following the progress of legislation that if enacted would resolve the issues on expense disallowance and eliminate the uncertainty created by the court ruling in Ceridian vs. Franchise Tax Board for all tax
years through December 31, 2003. Without a legislative solution, years of future litigation may be required to determine the ultimate outcome of the expense disallowance and DRD issues. Because of the uncertainty surrounding these issues, it is
difficult to predict the ultimate amount the Company may be required to pay, if any. Consistent with the proposed legislation and the Companys expectations of a legislative solution, the Company has established a tax contingency reserve of
approximately $3 million, net of federal tax benefits, for all California franchise tax issues including the disallowance of expenses and DRD issues.



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 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. The Company believes that adverse results, if any, in the actions currently pending should not have a material effect on the
Companys operations or financial position. Also, see the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



10



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In Robert Krumme, On Behalf Of The General Public vs. Mercury Insurance Company, Mercury Casualty
Company, and California Automobile Insurance Company (Superior Court for the City and County of San Francisco), initially filed June 30, 2000, the plaintiff has asserted an unfair trade practices claim under Section 17200 of the California
Business and Professions Code. Specifically, the case involves a dispute over the legality of broker fees (generally less than $100 per policy) charged by independent brokers who sell the Companys products to consumers that purchase insurance
policies written by the Mercury Insurance Company, Mercury Casualty Company and California Automobile Insurance Company (collectively, the California Companies). The plaintiff asserts that the brokers who sell the Companys products
should not charge broker fees and that the Company benefits from these fees and should be liable for them. The plaintiff sought an elimination of the broker fees and restitution of previously paid broker fees. In April 2003, the court ruled that the
brokers involved in the suit were in fact agents of the Company; however, the court also held that the Company was not responsible for retroactive restitution. The court issued an injunction on May 16, 2003 that prevents Mercury from either (a)
selling auto or homeowners insurance through any producer that is not appointed as an agent under Insurance Code, Section 1704, (b) selling auto or homeowners insurance through any producer that charges broker fees and (c) engaging in comparative
rate advertising and failing to disclose the possibility that a broker fee may be charged. Mercury has appealed, which has the effect of staying all but the advertising aspects of the courts injunction. The Companys appeal is based on
the fact that the broker fees are subject to direct  and, if they could be attributed to Mercury, exclusive  regulation by the Insurance Commissioner. The law allows a broker to perform agent functions without giving up broker status. In
the past, the California Insurance Commissioner never found broker fees were either being improperly charged or attributable to Mercury. The appeal has been fully briefed and the Company is awaiting a court date for oral arguments which is expected
no sooner than June 2004.



In February 2004, the California DOI
issued a Notice of Non-Compliance (NNC) to the California Companies based on the outcome of the Robert Krumme litigation. The NNC alleges that the California Companies willfully misrepresented the actual price insurance consumers could
expect to pay for insurance by the amount of a one-time fee charged by the consumers insurance broker. The California Companies filed a Notice of Defense which is based on the same grounds forming the Companys defense in the Robert
Krumme case. The administrative proceeding has been stayed at the California DOIs request until a decision is reached in the Robert Krumme case. The impact of this NNC can not be determined at the present time. However, the Company intends to
continue to vigorously defend this case.



Sam Donabedian,
individually, and on behalf of those similarly situated vs. Mercury Insurance Company(Los Angeles Superior Court), initially filed April 20, 2001, involves a dispute over insurance rates/premiums charged to the plaintiff and the legality of
persistency discounts. The action was dismissed when Mercurys Demurrer to the plaintiffs First Amended Complaint was sustained without leave to amend. The dismissal of this case was appealed and then overruled by an Appellate Court on
the basis that there is a factual issue as to whether the persistency discounts as applied comply with the Companys class plan and the California Insurance Code. The Company believes that the conclusion reached by the Appellate Court lacks
merit, that the case was properly decided as an issue of law by the Superior Court, and has requested the California Supreme Court to hear this case rather than return it to the Superior Court for trial. The Company intends to vigorously defend this
case.



Critical Accounting Policies



The preparation of the Companys financial statements requires judgment
and estimates. The most significant is the estimate of loss reserves as required by Statement of Financial Accounting Standards No. 60, Accounting



11



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and Reporting by Insurance Enterprises (SFAS No. 60) and Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies (SFAS No. 5). Estimating loss reserves is a difficult process as there are many factors that can ultimately affect the final settlement of a claim and, therefore, the reserve that is
needed. Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of repair materials and labor rates can all impact ultimate claim costs. In addition, time can be a critical part of reserving determinations
since the longer the period between the incidence of a loss and the payment or settlement of the 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. Inflation is reflected in the reserving process through analysis of cost trends and reviews of historical reserving results.



The Company performs its own loss reserve analysis and also engages the services of an independent actuary to assist in the
estimation of loss reserves. The Company and the actuary do not calculate a range of loss reserve estimates but rather calculate a point estimate. Management reviews the underlying factors and assumptions that serve as the basis for preparing the
reserve estimate. These include paid and incurred loss development factors, expected average costs per claim, inflation trends, expected loss ratios, industry data and other relevant information. At March 31, 2004, the Company recorded $805.7
million in loss and loss adjustment expense reserves. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date. Since the
provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provision.



The Company complies with the SFAS No. 60 definition of how insurance enterprises should recognize revenue on insurance policies written. The
Companys insurance premiums are recognized as income ratably over the term of the policies. 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. To the extent that any of the Companys lines of business become
substantially unprofitable, then a premium deficiency reserve may be required. The Company does not expect this to occur on any of its significant lines of business.



The Company carries its fixed maturity and equity investments at market value as required for securities classified as
Available for Sale by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). In most cases, market valuations were drawn from trade
data sources. In no case were any valuations made by the Companys management. Equity holdings, including non-sinking fund preferred stocks, are, with minor exceptions, actively traded on national exchanges, and were valued at the last
transaction price on the balance sheet date. The Company constantly evaluates its investments for other than temporary declines and writes them off as realized losses through the Statement of Income, as required by SFAS No. 115 when recovery of the
net book value appears doubtful. Temporary unrealized investment gains and losses are credited or charged directly to shareholders equity as accumulated other comprehensive income, net of applicable taxes. It is possible that future
information will become available about the Companys current investments that would require accounting for them as realized losses due to other than temporary declines in value. The financial statement effect would be to move the unrealized
loss from accumulated other comprehensive income on the Balance Sheet to realized investment losses on the Statement of Income.



The Company may have certain known and unknown potential liabilities that are evaluated using the criteria established by SFAS No. 5. These



12



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include claims, assessments or lawsuits incidental to the Companys business. The Company continually evaluates
these potential liabilities and accrues for them or discloses them 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, management does not expect them to
have a material effect on the consolidated operations or financial position.



Certain statements in this report on Form 10-Q that are not historical fact 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, our 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 our 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. Factors that could cause or contribute to such differences include, among others: the competition currently existing in the California
automobile insurance markets, our success in expanding our business in states outside of California, the impact of potential third party bad-faith legislation, changes in laws or regulations, the outcome of tax position challenges by the
California FTB, decisions of courts, regulators and governmental bodies, particularly in California, our ability to obtain and the timing of the approval of the California Insurance Commissioner for premium rate changes for private passenger
automobile policies issued in California and similar rate approvals in other states where we do business, the level of investment yields we are able to obtain with our investments in comparison to recent yields and the market risk associated with
our investment portfolio, 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, uncertainties related to assumptions and projections generally, inflation and changes in economic conditions, changes in driving patterns and loss trends, acts of war and terrorist activities, court decisions and trends in litigation
and health care and auto repair costs, and other uncertainties, all of which are difficult to predict and many of which are beyond our 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 an accrual 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 we incorporate 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 our forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from
those predicted in any forward-looking statements.



Results of Operations



Three Months Ended March 31, 2004
compared to Three Months Ended March 31, 2003



Premiums
earned in the first quarter of 2004 increased approximately 18% from the corresponding period in 2003. Net premiums written in the first quarter of 2004 increased 17% from the corresponding period in 2003. Net premiums written on the California
automobile lines of business were $462.0 million in the first quarter of 2004, an increase of approximately 10% over the same period in 2003. Net premiums written by the non-California



13



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operations were $130.2 million in the first quarter, an increase of 52% over the same period in 2003. The growth in net
premiums written is primarily due to an increase in unit sales and rate increases taken during 2003.



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 (000s) for the quarters ended March 31, 2004
and 2003, respectively:



|                              |  |                         |         |      |   |        
|----------------------------- |  | ----------------------- | ------- | ---- | - | -------
|                              |  | Quarter Ended March 31,
|                              |  | 2004                    |         | 2003
|Net premiums written          |  | $                       | 630,283 |      | $ | 538,750
|Increase in unearned premiums |  |                         | 38,346  |      |   | 38,084 
|                              |  |                         |         |      |   |        
|Earned premiums               |  | $                       | 591,937 |      | $ | 500,666
|                              |  |                         |         |      |   |        



The loss ratio (GAAP
basis) in the first quarter (loss and loss adjustment expenses related to premiums earned) was 62.8% in 2004 and 68.2% in 2003. The lower loss ratio in the quarter, as compared to the first quarter of 2003, is largely attributable to rate increases
taken during 2003 and positive development of approximately $15 million on the 2003 and prior period accident year loss reserves.



The expense ratio (GAAP basis) (policy acquisition costs and other expenses related to premiums earned) in the first quarter of 2004 was 26.3% compared to
26.2% in the corresponding period of 2003. Total expenses increased at essentially the same rate as premium volume.



The combined ratio of losses and expenses (GAAP basis) is the key measure of underwriting performance traditionally used in the property and casualty
insurance industry. A combined ratio under 100% generally reflects profitable underwriting results; a combined ratio over 100% generally reflects unprofitable underwriting results. The combined ratio of losses and expenses (GAAP basis) was 89.1% in
the first quarter of 2004 compared with 94.4% in 2003, which indicates that the Companys underwriting performance contributed $64.5 million to the Companys income before income taxes of $96.3 million during 2004 versus contributing $28.1
million to the Companys income before income tax of $54.8 million in 2003.



Investment income for the first quarter 2004 was $25.7 million, compared with $26.9 million in the first quarter of 2003. The after-tax yield on average investments (fixed maturities and equities valued at cost) was
3.66% in the first quarter of 2004 compared to 4.33% in the corresponding period of 2003 on average invested assets of $2,507.4 million and $2,208.2 million, respectively. The decrease in after-tax yield is largely due to overall lower yields earned
on the portfolio which is reflective of current market conditions.



Interest expense was $0.7 million for the first quarter of 2004 compared to $0.7 million for the first quarter of 2003.



The income tax provision in the first quarter of 2004 of $27.5 million represented an effective tax rate of 29%, compared with an effective rate of 23% in
the corresponding period of 2003. The higher rate in 2004 is primarily attributable to the increased proportion of underwriting income which is taxed at the full corporate rate of 35%, in contrast with investment income which includes tax exempt
interest and tax sheltered dividend income.



Net income for the
first quarter 2004 of $68.8 million, or $1.26 per share (diluted), compares with $42.1 million, or $0.77 per share (diluted), in the corresponding period of 2003. Basic net income per share was $1.26 in 2004 and $0.77 in 2003.



14



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Liquidity and Capital Resources



Net cash provided from operating activities in 2004 was $115.0 million, an increase of $13.8 million over the same period in
2003. This increase was primarily due to the growth in premiums reflecting increases in both policy sales and rates partially offset by an increase in losses and loss adjustment expense paid in 2004. The Company has utilized the cash provided from
operating activities primarily to increase its investment in fixed maturity securities, the purchase and development of information technology and the payment of dividends to its shareholders. Funds derived from the sale, redemption or maturity of
fixed maturity investments of $166.5 million, was reinvested by the Company generally in higher-rated fixed maturity securities.



The Companys cash and short-term cash investment portfolio totaled $338.8 million at March 31, 2004. Together with cash flows from operations, the
Company believes that such liquid assets are 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.



The market value of all investments (fixed-maturities and equities) held at market as Available for Sale
exceeded amortized cost of $2,490.1 million at March 31, 2004 by $141.7 million. That net unrealized gain of $141.7 million, reflected in shareholders equity, net of applicable tax effects, was $92.1 million at March 31, 2004, compared with a
net unrealized gain of $130.5 million or $84.8 million, net of applicable tax effects, at December 31, 2003. The increase in unrealized gains is largely due to an increase in the market value of bond holdings resulting from the current interest rate
environment and the partial recovery in value of previously written down equity securities.



At March 31, 2004, the average rating of the $2,066.3 million bond portfolio at market (amortized cost $1,967.4 million) was AA, the same average rating at December 31, 2003. Bond holdings are broadly diversified
geographically, within the tax-exempt sector. California state bonds represent 4.4% of the total bond portfolio and carry a net unrealized gain of $2.8 million at March 31, 2004. Holdings in the taxable sector consist principally of investment grade
issues. At March 31, 2004, bond holdings rated below investment grade totaled $51.6 million at market (cost $52.0 million) representing approximately 2% of total investments. This compares to approximately $52.8 million at market (cost $53.3
million) representing 2% of total investments at December 31, 2003.



The following table sets forth the composition of the investment portfolio of the Company as of March 31, 2004:



|                                      |  |                        |           |              |   |          
|------------------------------------- |  | ---------------------- | --------- | ------------ | - | ---------
|                                      |  | Amortized cost         |           | Market value
|                                      |  | (Amounts in thousands)
|Fixed maturity securities:            |  |                        |           |              |   |          
|U.S. government bonds and agencies    |  | $                      | 317,525   |              | $ | 319,807  
|Municipal bonds                       |  |                        | 1,540,119 |              |   | 1,630,133
|Corporate bonds                       |  |                        | 109,779   |              |   | 116,342  
|Redeemable preferred stock            |  |                        | 11,071    |              |   | 11,227   
|                                      |  |                        |           |              |   |          
|                                      |  | $                      | 1,978,494 |              | $ | 2,077,509
|                                      |  |                        |           |              |   |          
|Equity securities:                    |  |                        |           |              |   |          
|Common Stock:                         |  |                        |           |              |   |          
|Public utilities                      |  | $                      | 77,324    |              | $ | 94,422   
|Banks, trusts and insurance companies |  |                        | 12,853    |              |   | 17,219   
|Industrial and other                  |  |                        | 67,500    |              |   | 81,670   
|Non-redeemable preferred stock        |  |                        | 66,381    |              |   | 73,431   
|                                      |  |                        |           |              |   |          
|                                      |  | $                      | 224,058   |              | $ | 266,742  
|                                      |  |                        |           |              |   |          



15



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The Company writes covered call options through listed exchanges and over the counter with the intent of
generating additional income or return on capital. The total underlying investment under the covered call program in the first quarter of 2004 was approximately $35 million. The Company as a writer of an option bears the market risk of an
unfavorable change in the price of the security underlying the written option. The Board of Directors has authorized the Companys management to commence selling put options in 2004 and to increase its option writing program up to $40 million.



The Company monitors its investments closely. If an unrealized
loss is determined to be other than temporary it is written off as a realized loss through the Consolidated Statement of Income. The Companys methodology of assessing other than temporary impairments is based on security-specific analysis as
of the balance sheet date and considers various factors including the length of time and the extent to which the fair value has been less than the cost, the financial condition and the near term prospects of the issuer, whether the debtor is current
on its contractually obligated interest and principal payments, and the Companys intent to hold the investment for a period of time sufficient to allow the Company to recover its costs. The Company did not recognize any write-down of its
investments as other than temporary declines during the first quarter of 2004.



During the first quarter of 2004, the Company recognized approximately $5.7 million in net realized gains from the disposal (sale, call or maturity) of securities which is comprised of realized gains of $6.9 million
offset by realized losses of $1.2 million. These realized losses were derived from the disposal of securities with a total amortized cost of approximately $47.0 million. Approximately $0.8 million of the $1.2 million total realized loss relates to
securities held as of December 2003 with no loss on any one individual security exceeding $0.1 million.



At March 31, 2004, the Company had a net unrealized gain on all investments of $141.7 million before income taxes which is comprised of gross unrealized
gains of $152.0 million offset by unrealized losses of $10.3 million. Unrealized losses represent 0.5% of total investments at amortized cost. Of these unrealized losses, approximately $6.4 million relate to fixed maturity investments and the
remaining $3.9 million relate to equity securities.



The
following table illustrates the gross unrealized losses included in the Companys investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been
in a continuous unrealized loss position as of March 31, 2004.



|                                                                                      |  |                        |       |                   |   |                   |  |            |       |                   |   |            |  |   |        |  |   |        
|------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ----------------- | - | ----------------- |  | ---------- | ----- | ----------------- | - | ---------- |  | - | ------ |  | - | -------
|                                                                                      |  | Less than 12 months    |       | 12 months or more |   | Total            
|                                                                                      |  | Unrealized Losses      |       | Fair Value        |   | Unrealized Losses |  | Fair Value |       | Unrealized Losses |   | Fair Value
|                                                                                      |  | (Amounts in thousands)
|U.S. Treasury Securities and obligations of U.S. government corporations and agencies |  | $                      | 980   |                   | $ | 97,565            |  | $          | 139   |                   | $ | 3,146      |  | $ | 1,119  |  | $ | 100,711
|Obligations of states and political subdivisions                                      |  |                        | 1,822 |                   |   | 180,872           |  |            | 2,151 |                   |   | 22,259     |  |   | 3,973  |  |   | 203,131
|Corporate securities                                                                  |  |                        | 195   |                   |   | 30,658            |  |            | 855   |                   |   | 4,338      |  |   | 1,050  |  |   | 34,996 
|Redeemable Preferred Stock                                                            |  |                        | 9     |                   |   | 1,262             |  |            | 220   |                   |   | 4,935      |  |   | 229    |  |   | 6,197  
|                                                                                      |  |                        |       |                   |   |                   |  |            |       |                   |   |            |  |   |        |  |   |        
|Subtotal, debt securities                                                             |  | $                      | 3,006 |                   | $ | 310,357           |  | $          | 3,365 |                   | $ | 34,678     |  | $ | 6,371  |  | $ | 345,035
|Equity Securities                                                                     |  |                        | 2,577 |                   |   | 89,830            |  |            | 1,315 |                   |   | 19,178     |  |   | 3,892  |  |   | 109,008
|                                                                                      |  |                        |       |                   |   |                   |  |            |       |                   |   |            |  |   |        |  |   |        
|Total temporarily impaired securities                                                 |  | $                      | 5,583 |                   | $ | 400,187           |  | $          | 4,680 |                   | $ | 53,856     |  | $ | 10,263 |  | $ | 454,043
|                                                                                      |  |                        |       |                   |   |                   |  |            |       |                   |   |            |  |   |        |  |   |        



16



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Approximately $9.0 million of the unrealized losses are represented by a large number of individual
securities with unrealized losses of less than 20% of each securitys amortized cost. Of these, the most significant unrealized losses relate to one corporate bond and one equity security with unrealized losses of approximately $0.9 million and
$0.7 million, respectively, representing market value declines of 16% and 10% of amortized cost. The remaining $1.3 million represents unrealized losses that exceed 20% of amortized costs which includes two bond obligations and eight equity
securities. Of these securities, the most significant relates to a single, non-investment grade bond obligation of a major airline with a gross unrealized loss of $0.8 million. This bond is supported by gate lease revenues at the Dallas-Fort Worth
(DFW) airport. Given the status of DFW as the third busiest airport in the world, the Company believes that these gates are of vital strategic importance to the airline. The airline is current on their interest obligations for these
bonds and the bond has shown some recovery over the recent six months. The Company has the ability and intent to hold securities with unrealized losses until they recover their value. In the future, information may come to light or circumstances may
change that would cause the Company to write-down or sell these securities and incur a realized loss.



The Company has concluded that the gross unrealized losses of $10.3 million at March 31, 2004 were temporary in nature. However, facts and circumstances
may change which could result in a decline in market value considered to be other than temporary.



The amortized cost and estimated market value of fixed maturities available for sale with unrealized losses exceeding 20% of amortized cost as of March
31, 2004 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                       |  |                        |       |                       |   |      
|-------------------------------------- |  | ---------------------- | ----- | --------------------- | - | -----
|                                       |  | Amortized Cost         |       | EstimatedMarket Value
|                                       |  | (Amounts in thousands)
|Fixed maturities available for sale:   |  |                        |       |                       |   |      
|                                       |  |                       
|Due in one year or less                |  | $                      |      |                       | $ |     
|Due after one year through five years  |  |                        |      |                       |   |     
|Due after five years through ten years |  |                        |      |                       |   |     
|Due after ten years                    |  | $                      | 3,476 |                       | $ | 2,613



The Company has no
material direct investments in real estate. The Company intends to fund the expansion into Arizona and any future personal automobile markets and related capital requirements through the use of internally generated funds.



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 to 1. Based on the combined surplus of all of the



17



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licensed insurance subsidiaries of $1,204.2 million at March 31, 2004 and net written premiums for the twelve months
ended on that date of $2,360.3 million, the ratio of writings to surplus was approximately 2.0 to 1.



The Companys book value per share at March 31, 2004 was $24.10 per share.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



There have been no material changes in the Companys investment
strategies, types of financial instruments held or the risks associated with such instruments which would materially alter the market risk disclosures made in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



Item 4. 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.



There has been no change in the Companys internal controls 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 controls over financial reporting.



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 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. The Company believes that adverse
results, if any, in the actions currently pending should not have a material effect on the Companys operations or financial position. Also, see the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



18



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In Robert Krumme, On Behalf Of The General Public vs. Mercury Insurance Company, Mercury Casualty
Company, and California Automobile Insurance Company (Superior Court for the City and County of San Francisco), initially filed June 30, 2000, the plaintiff has asserted an unfair trade practices claim under Section 17200 of the California
Business and Professions Code. Specifically, the case involves a dispute over the legality of broker fees (generally less than $100 per policy) charged by independent brokers who sell the Companys products to consumers that purchase insurance
policies written by the Mercury Insurance Company, Mercury Casualty Company and California Automobile Insurance Company (collectively, the California Companies). The plaintiff asserts that the brokers who sell the Companys products
should not charge broker fees and that the Company benefits from these fees and should be liable for them. The plaintiff sought an elimination of the broker fees and restitution of previously paid broker fees. In April 2003, the court ruled that the
brokers involved in the suit were in fact agents of the Company; however, the court also held that the Company was not responsible for retroactive restitution. The court issued an injunction on May 16, 2003 that prevents Mercury from either (a)
selling auto or homeowners insurance through any producer that is not appointed as an agent under Insurance Code, Section 1704, (b) selling auto or homeowners insurance through any producer that charges broker fees and (c) engaging in comparative
rate advertising and failing to disclose the possibility that a broker fee may be charged. Mercury has appealed, which has the effect of staying all but the advertising aspects of the courts injunction. The Companys appeal is based on
the fact that the broker fees are subject to direct  and, if they could be attributed to Mercury, exclusive  regulation by the California Insurance Commissioner. The law allows a broker to perform agent functions without giving up broker
status. In the past, the Insurance Commissioner never found broker fees were either being improperly charged or attributable to Mercury. The appeal has been fully briefed and the Company is awaiting a court date for oral arguments which is expected
no sooner than June 2004.



In February 2004, the California DOI
issued a Notice of Non-Compliance (NNC) to the California Companies based on the outcome of the Robert Krumme litigation. The NNC alleges that the California Companies willfully misrepresented the actual price insurance consumers could
expect to pay for insurance by the amount of a one-time fee charged by the consumers insurance broker. The California Companies filed a Notice of Defense which is based on the same grounds forming the Companys defense in the Robert
Krumme case. The administrative proceeding has been stayed at the California DOIs request until a decision is reached in the Robert Krumme case. The impact of this NNC can not be determined at the present time. However, the Company intends to
continue to vigorously defend this case.



Sam Donabedian,
individually, and on behalf of those similarly situated vs. Mercury Insurance Company(Los Angeles Superior Court) involves a dispute over insurance rates/premiums charged to the plaintiff and the legality of persistency discounts. The action
was dismissed when Mercurys Demurrer to the plaintiffs First Amended Complaint was sustained without leave to amend. The dismissal of this case was appealed and then overruled by an Appellate Court on the basis that there is a factual
issue as to whether the persistency discounts as applied comply with the Companys class plan and the California Insurance Code. The Company believes that the conclusion reached by the Appellate Court lacks merit, that the case was properly
decided as an issue of law by the Superior Court, and has requested the California Supreme Court to hear this case rather than return it to the Superior Court for trial. The Company intends to vigorously defend this case.



Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities





|         |  |                                |  |                            |       |                                                                            |   |                                                                                                    |   |            
|-------- |  | ------------------------------ |  | -------------------------- | ----- | -------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------- | - | -----------
|Period   |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |       | Total Number ofSharesPurchased aspart of PubliclyAnnouncedPlans orPrograms |   | Maximum Number(or ApproximateDollar Value) ofShares that MayBe PurchasedUnder the Plans orPrograms
|January  |  |                               |  |                            |      |                                                                            |  |                                                                                                    |   |           
|February |  | 19,835                         |  | $                          | 50.23 |                                                                            |  |                                                                                                    | $ | 200,000,000
|March    |  |                               |  |                            |      |                                                                            |  |                                                                                                    |   |           
|Total    |  | 19,835                         |  | $                          | 50.23 |                                                                            |  |                                                                                                    | $ | 200,000,000



During the first
quarter of 2004, the Mercury General Corporation Profit Sharing Plan acquired 19,835 shares of the Companys common stock in open market transactions. These shares were contributed to the Companys employee stock ownership plan as
authorized by the Board of Directors. The purchase of this stock was not made pursuant to the Companys stock repurchase program whereby the Company may purchase over a one-year period up to $200 million of Mercury General common stock.
Initially announced and approved in 1998, the Companys stock repurchase program is re-approved annually by the Board of Directors and will expire in July, 2004, unless extended by the Board of Directors. The last purchase of common stock by
the Company under its stock repurchase program was made in 2000.



Item 3. Defaults Upon Senior Securities



None



19



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Item 4. Submission of Matters to a Vote of Securities Holders



None



Item 5. Other Information



None



Item 6. Exhibits and Reports on Form 8-K



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15.1 |  | Letter regarding unaudited interim financial information                                                                                                                                                                                                                                                                                                                                                                                                              
|     | 
|23.1 |  | Independent Accountants Consent                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|31.1 |  | Certifications of Registrants Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                          
|     | 
|32.1 |  | Certifications of Registrants Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. These
certifications are being furnished solely to accompany this Quarterly Report on Form 10-Q and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any
filing of the Company.



20



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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: May 3, 2004 |  | By:                         |  | /s/ George Joseph                         
|                  |  |                             |  | George Joseph                             
|                  |  |                             |  | Chairman and Chief Executive Officer      
|                  |  |                            
|Date: May 3, 2004 |  | By:                         |  | /s/ Theodore Stalick                      
|                  |  |                             |  | Theodore Stalick                          
|                  |  |                             |  | Vice President and Chief Financial Officer



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