(State or other jurisdiction Smaller reporting company o AND SUBSIDIARIES Investments: Fixed maturities available for sale, at fair value (amortized cost: $2,860,455) Fixed maturities trading, at fair value (amortized cost: $2,804,426) Equity securities available for sale, at fair value (cost $317,869) Equity securities trading, at fair value (cost $387,607; $13,126) Short-term investments, at fair value (amortized cost $252,849; $272,678) Total investments Cash Receivables: Premiums receivable Premium notes Accrued investment income Other Total receivables Deferred policy acquisition costs Fixed assets, net Deferred income taxes Other assets Total assets Losses and loss adjustment expenses Unearned premiums Notes payable Accounts payable and accrued expenses Current income taxes Deferred income taxes Other liabilities Total liabilities Commitments and contingencies Shareholders’ equity: Common stock without par value or stated value: (Authorized 70,000,000 shares; issued and outstanding 54,729,913 shares in 2008 and 54,729,913 shares in 2007) Accumulated other comprehensive income Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity data) AND SUBSIDIARIES Revenues: Earned premiums Net investment income Net realized investment losses Other Total revenues Expenses: Losses and loss adjustment expenses Policy acquisition costs Other operating expenses Interest Total expenses (Loss) income before income taxes (Benefit from) provision for income taxes Net (loss) income BASIC EARNINGS PER SHARE (weighted average shares outstanding 54,729,913 in 2008 and 54,673,789 in 2007) DILUTED EARNINGS PER SHARE (weighted average shares 54,750,114 as adjusted by 20,201 for the dilutive effect of options in 2008 and 54,820,655 as adjusted by 146,866 for the dilutive effect of options in 2007) Dividends declared per share data) AND SUBSIDIARIES Net (loss) income Other comprehensive (loss) income, before tax: Net unrealized gains on available-for-sale securities Losses on cash flow hedge Other comprehensive (loss) income, before tax Income tax expense related to net unrealized gains on available-for-sale securities Income tax benefit related to losses on cash flow hedge Comprehensive (loss) income, net of tax except share and per share data) AND SUBSIDIARIES Cash flows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization Net realized investment losses Bond amortization, net Excess tax benefit from exercise of stock options Increase in premiums receivable Increase in premium notes receivable Increase in deferred policy acquisition costs Decrease in unpaid losses and loss adjustment expenses Increase in unearned premiums Increase (decrease) in accounts payable and accrued expenses (Decrease) increase in liability for taxes Net decrease in securities held for trading, net of realized gains and losses Share-based compensation Other, net Net cash provided by operating activities Cash flows from investing activities: Fixed maturities available for sale in nature: Purchases Sales Calls or maturities Equity securities available for sale in nature: Purchases Sales Increase in payable for securities, net Net decrease in short-term investments Purchase of fixed assets Sale of fixed assets Other, net Net cash used in investing activities Cash flows from financing activities: Dividends paid to shareholders Proceeds from bank loan Proceeds from stock options exercised Excess tax benefit from exercise of stock options Net cash used in financing activities Net increase (decrease) in cash Cash: Beginning of the period End of the period Supplemental disclosures of cash flow information: Interest paid during the period Income taxes paid during the period Net realized gains from sale of investments thousands) Short-term investments Fixed maturity securities Equity securities Total 159: The Company’s financial instruments are classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, active listed equities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. The types of instruments valued based on quoted prices for similar assets or liabilities in active markets, executable quotes for assets and liabilities in less active markets, or inputs derived from observable market data include most corporate bonds, most mortgage products, redeemable and non-redeemable preferred stocks, state, municipal and provincial obligations, and notes payable. Such instruments are generally classified within level 2 of the fair value hierarchy. Assets Fixed maturity securities: U.S. government bonds and agencies Obligations of states and political subdivisions Mortgage-backed securities Corporate securities Redeemable preferred stock Equity securities: Common stock: Public utilities Banks, trusts and insurance companies Industrial and other Non-redeemable preferred stock Short-term investments Derivative contracts Total assets at fair value Liabilities Notes payable Derivative contracts Other Total liabilities at fair value The operating results of property and casualty insurance companies are subject to significant quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and severity of losses, natural disasters, general economic conditions, the general regulatory environment in those states in which an insurer operates, state regulation of premium rates, and other factors such as changes in tax laws. The property and casualty industry has been highly cyclical, with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. These cycles can have a large impact on the ability of the Company to grow and retain business. Additionally, with the adoption of SFAS No. 159, changes in the fair value of the investment portfolio are reflected in net income, which may result in volatility of earnings. In addition, the Oklahoma and Texas DOIs notified the Company of the upcoming financial examination of its insurance subsidiaries in each state covering the period January 1, 2005 through December 31, 2007. The Florida DOI is scheduled to begin its market conduct examination of the Company’s business written in the state on August 15, 2008 covering the period October 1, 2005 through December 31, 2006. date. In March 2006, the California DOI issued an Amended Notice of Non-Compliance (“NNC”) to the NNC originally issued in February 2004 alleging that the Company charged rates in violation of the California Insurance Code, willfully permitted its agents to charge broker fees in violation of California law, and willfully misrepresented the actual price insurance consumers could expect to pay for insurance by the amount of a fee charged by the consumer’s insurance broker. Through this action, the California DOI seeks to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee, which the California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the California DOI seeks to impose a penalty for each and every date on which the Company allegedly used a misleading advertisement alleged in the NNC. Finally, based upon the conduct alleged, the California DOI also contends that the Company acted fraudulently in violation of Section 704(a) of the California Insurance Code, which permits the California Commissioner of Insurance to suspend certificates of authority for a period of one year. The Company filed a Notice of Defense in response to the NNC. The Company does not believe that it has done anything to warrant a monetary penalty from the California DOI. The San Francisco Superior Court, inRobert Krumme, On Behalf Of The General Public v. Mercury Insurance Company, Mercury Casualty Company, and California Automobile Insurance Company, denied plaintiff’s requests for restitution or any other form of retrospective monetary relief based on the same facts and legal theory. The matter is currently in discovery and a hearing before the administrative law judge has been scheduled to be held October 6, 2008. these matters. The Company complies with SFAS No. 60 in recognizing revenue on insurance policies written. The Company’s insurance premiums are recognized as income ratably over the term of the policies, that is, in proportion to the amount of insurance protection provided. Unearned premiums are carried as a liability on the balance sheet and are computed on a monthly pro-rata basis. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized acquisition costs and maintenance costs to related unearned premiums, net of investment income. To the extent that any of the Company’s lines of business become substantially unprofitable, a premium deficiency reserve may be required. The Company does not expect this to occur on any of its significant lines of business. Beginning January 1, 2008, all of the Company’s fixed maturity and equity investments are classified as “trading” and carried at fair value as required by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), as amended, and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). Prior to January 1, 2008, the Company’s fixed maturity and equity investment portfolios were classified either as “available for sale” or “trading” and carried at fair value under SFAS No. 115, as amended. The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) and SFAS No. 159 as of the beginning of 2008. See Notes 2, 3 and 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. No valuations were made by the Company’s management. Equity holdings, including non-sinking fund preferred stocks, are, with minor exceptions, actively traded on national exchanges or trading markets, and were valued at the last transaction price on the balance sheet date. Changes in fair value of the investments are reflected in net realized investment gains or losses in the consolidated statements of income as required under SFAS No. 115, as amended, and SFAS No. 159. quoted. could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain periods. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-Q or, in the case of any document the Company incorporates by reference, the date of that document. Investors also should understand that it is not possible to predict or identify all factors and should not consider the risks set forth above to be a complete statement of all potential risks and uncertainties. If the expectations or assumptions underlying the Company’s forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those predicted in any forward-looking statements. The factors identified above are believed to be some, but not all, of the important factors that could cause actual events and results to be significantly different from those that may be expressed or implied in any forward-looking statements. Any forward-looking statements should also be considered in light of the information provided in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and in Item 1A. Risk Factors in Part Net premiums written Increase in unearned premiums Earned premiums earned: business. profitable underwriting results; a combined ratio over 100% generally reflects unprofitable underwriting results. The combined ratio of losses and expenses (GAAP basis) was $1.27 in the second quarter of 2007. yields contributed to the decrease in operating income. Operating income Net realized investment losses, net of tax Net (loss)/income measure: maturity and equity 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 Fixed maturity securities: U.S. government bonds and agencies States, municipalities and political subdivisions Mortgage-backed securities Corporate securities Redeemable preferred stock Equity securities: Common Stock: Public utilities Banks, trusts and insurance companies Industrial and other Non-redeemable preferred stock Short-term cash investments Total investments 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.March 31,June 30, 2008California 95-2211612 California95-2211612(I.R.S. Employer of incorporation or organization) Identification No.) (I.R.S. EmployerIdentification No.)4484 Wilshire Boulevard, Los Angeles, California 90010 90010(Address of principal executive offices) (Zip Code) (Zip Code)Registrant’sRegistrant's telephone number, including area code: (323) 937-1060¨o¨o¨o Smaller reporting company ¨(Do(Do not check if a smaller reporting company)¨o No xApril 30,July 31, 2008, the Registrant had issued and outstanding an aggregate of 54,729,913 54,743,913 shares of its Common Stock.Item 1. Financial Statements (Unaudited)Amounts expressed indata March 31,
2008 December 31,
2007ASSETS $ — $ 2,887,760 2,775,430 — — 413,123 446,147 15,114 252,485 272,678 3,474,062 3,588,675 50,559 48,245 297,150 294,663 32,194 27,577 37,517 36,436 9,466 9,010 376,327 367,686 210,542 209,805 190,294 172,357 4,342 — 37,932 27,728 $ 4,344,058 $ 4,414,496 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,042,523 $ 1,103,915 946,675 938,370 160,118 138,562 126,255 125,755 22,691 3,150 — 30,852 219,623 211,894 2,517,885 2,552,498 69,538 69,369 (289 ) 80,557 1,756,924 1,712,072 1,826,173 1,861,998 $ 4,344,058 $ 4,414,496 June 30, December 31, 2008 2007 ASSETS Investments: Fixed maturities available for sale, at fair value (amortized cost: $2,860,455) $ - $ 2,887,760 Fixed maturities trading, at fair value (amortized cost: $2,814,579) 2,772,028 - Equity securities available for sale, at fair value (cost: $317,869) - 413,123 Equity securities trading, at fair value (cost: $397,892; $13,126) 493,143 15,114 Short-term investments, at fair value (amortized cost: $219,197; $272,678) 218,884 272,678 Total investments 3,484,055 3,588,675 Cash 43,239 48,245 Receivables: Premiums receivable 279,478 294,663 Premium notes 29,665 27,577 Accrued investment income 36,850 36,436 Other 7,595 9,010 Total receivables 353,588 367,686 Deferred policy acquisition costs 205,954 209,805 Fixed assets, net 188,504 172,357 Other assets 35,444 27,728 Total assets $ 4,310,784 $ 4,414,496 LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $ 1,020,932 $ 1,103,915 Unearned premiums 919,622 938,370 Notes payable 154,067 138,562 Accounts payable and accrued expenses 119,402 125,755 Current income taxes 4,056 3,150 Deferred income taxes 3,149 30,852 Other liabilities 223,228 211,894 Total liabilities 2,444,456 2,552,498 Commitments and contingencies Shareholders' equity: Common stock without par value or stated value: (Authorized 70,000,000 shares; issued and outstanding 54,743,913 shares in 2008 and 54,729,913 shares in 2007) 70,250 69,369 Accumulated other comprehensive income 175 80,557 Retained earnings 1,795,903 1,712,072 Total shareholders' equity 1,866,328 1,861,998 Total liabilities and shareholders’ equity $ 4,310,784 $ 4,414,496 (Unaudited)Three Months Ended March 31,Amounts expressed data 2008 2007 $ 720,916 $ 755,752 39,299 42,145 (92,137 ) (1,042 ) 1,294 1,347 669,372 798,202 483,473 509,759 160,141 165,211 44,315 39,367 510 2,366 688,439 716,703 (19,067 ) 81,499 (15,106 ) 21,046 $ (3,961 ) $ 60,453 $ (0.07 ) $ 1.11 $ (0.07 ) $ 1.10 $ 0.58 $ 0.52 Three Months Ended June 30, 2008 2007 Revenues: Earned premiums $ 711,204 $ 754,076 Net investment income 38,995 40,795 Net realized investment gains 36,496 9,989 Other 1,202 1,225 Total revenues 787,897 806,085 Expenses: Losses and loss adjustment expenses 489,545 504,378 Policy acquisition costs 157,441 165,685 Other operating expenses 43,169 38,636 Interest 1,486 2,269 Total expenses 691,641 710,968 Income before income taxes 96,256 95,117 Provision for income taxes 25,530 25,608 Net income $ 70,726 $ 69,509 BASIC EARNINGS PER SHARE (weighted average shares outstanding 54,733,880 in 2008 and 54,697,028 in 2007) $ 1.29 $ 1.27 DILUTED EARNINGS PER SHARE (weighted average shares 54,997,272 as adjusted by 263,392 for the dilutive effect of options in 2008 and 54,847,531 as adjusted by 150,503 for the dilutive effect of options in 2007) $ 1.29 $ 1.27 Dividends declared per share $ 0.58 $ 0.52 COMPREHENSIVE INCOME(Unaudited)Three Months Ended March 31,Amounts expressed 2008 2007 $ (3,961 ) $ 60,453 — 14,335 (444 ) — (444 ) 14,335 — 5,000 (155 ) — $ (4,250 ) $ 69,788 Six Months Ended June 30, 2008 2007 Revenues: Earned premiums $ 1,432,120 $ 1,509,828 Net investment income 78,294 82,940 Net realized investment (losses) gains (55,641 ) 8,947 Other 2,496 2,572 Total revenues 1,457,269 1,604,287 Expenses: Losses and loss adjustment expenses 973,018 1,014,137 Policy acquisition costs 317,582 330,896 Other operating expenses 87,484 78,003 Interest 1,996 4,635 Total expenses 1,380,080 1,427,671 Income before income taxes 77,189 176,616 Provision for income taxes 10,424 46,654 Net income $ 66,765 $ 129,962 BASIC EARNINGS PER SHARE (weighted average shares outstanding 54,731,897 in 2008 and 54,685,473 in 2007) $ 1.22 $ 2.38 DILUTED EARNINGS PER SHARE (weighted average shares 54,894,590 as adjusted by 162,693 for the dilutive effect of options in 2008 and 54,828,667 as adjusted by 143,194 for the dilutive effect of options in 2007) $ 1.22 $ 2.37 Dividends declared per share $ 1.16 $ 1.04 CASH FLOWS(Unaudited)Three Months Ended March 31,Amounts expressed COMPREHENSIVE INCOMEthousands 2008 2007 $ (3,961 ) $ 60,453 6,449 6,296 92,137 1,042 2,681 567 — (57 ) (2,487 ) (12,165 ) (4,617 ) (4,379 ) (737 ) (6,408 ) (61,392 ) (10,518 ) 8,305 30,084 500 (17,256 ) (15,498 ) 3,264 6,811 — 169 145 3,809 1,595 32,169 52,663 (243,740 ) (591,197 ) 229,185 452,094 69,650 101,956 (123,031 ) (118,607 ) 56,455 95,692 7,394 13,770 19,829 37,864 (25,237 ) (12,762 ) 99 439 (6,716 ) (5,290 ) $ (16,112 ) $ (26,041 ) (Continued)5MERCURY GENERAL CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Continued) 2008 2007 $ (31,743 ) $ (28,434 ) 18,000 — — 424 — 57 (13,743 ) (27,953 ) 2,314 (1,331 ) 48,245 47,606 $ 50,559 $ 46,275 $ 2,571 $ 4,334 $ 391 $ 23,944 $ 3,402 $ 1,066 Three Months Ended June 30, 2008 2007 Net income $ 70,726 $ 69,509 Other comprehensive income (loss), before tax: Net unrealized losses on available-for-sale securities - (29,538 ) Gains on cash flow hedge 713 - Other comprehensive income (loss), before tax 713 (29,538 ) Income tax benefit related to net unrealized losses on available-for-sale securities - (10,321 ) Income tax expense related to gains on cash flow hedge 249 - Comprehensive income, net of tax $ 71,190 $ 50,292 Six Months Ended June 30, 2008 2007 Net income $ 66,765 $ 129,962 Other comprehensive income (loss), before tax: Net unrealized losses on available-for-sale securities - (15,203 ) Gains on cash flow hedge 269 - Other comprehensive income (loss), before tax 269 (15,203 ) Income tax benefit related to net unrealized losses on available-for-sale securities - (5,321 ) Income tax expense related to gains on cash flow hedge 94 - Comprehensive income, net of tax $ 66,940 $ 120,080 Six Months Ended June 30, 2008 2007 Cash flows from operating activities: Net income $ 66,765 $ 129,962 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,075 12,821 Net realized investment losses (gains) 55,641 (8,947 ) Bond amortization, net 3,643 2,079 Excess tax benefit from exercise of stock options (59 ) (170 ) Decrease (increase) in premiums receivable 15,185 (4,806 ) Increase in premium notes receivable (2,088 ) (1,951 ) Decrease (increase) in deferred policy acquisition costs 3,851 (4,119 ) (Decrease) increase in unpaid losses and loss adjustment expenses (82,983 ) 1,860 (Decrease) increase in unearned premiums (18,748 ) 13,431 Decrease in accounts payable and accrued expenses (6,353 ) (3,628 ) Decrease in liability for taxes (26,832 ) (14,404 ) Net decrease (increase) in securities held for trading, net of realized gains and losses 1,792 (8,493 ) Share-based compensation 327 292 Other, net (10,283 ) 1,450 Net cash provided by operating activities 12,933 115,377 Cash flows from investing activities: Fixed maturities available for sale in nature: Purchases (412,022 ) (1,055,169 ) Sales 329,915 844,592 Calls or maturities 124,949 176,510 Equity securities available for sale in nature: Purchases (238,349 ) (229,900 ) Sales 176,757 233,212 Increase in payable for securities, net 14,335 7,278 Net decrease (increase) in short-term investments 53,481 (1,271 ) Purchase of fixed assets (29,757 ) (26,589 ) Sale of fixed assets 776 176 Other, net 6,913 (3,469 ) Net cash provided by (used in) investing activities $ 26,998 $ (54,630 ) Cash flows from financing activities: Dividends paid to shareholders $ (63,491 ) $ (56,887 ) Proceeds from bank loan 18,000 - Proceeds from stock options exercised 495 1,834 Mortgage loan pay-off - (11,250 ) Excess tax benefit from exercise of stock options 59 170 Net cash used in financing activities (44,937 ) (66,133 ) Net decrease in cash (5,006 ) (5,386 ) Cash: Beginning of the period 48,245 47,606 End of the period $ 43,239 $ 42,220 Supplemental disclosures of cash flow information: Interest paid during the period $ 2,769 $ 4,534 Income taxes paid during the period $ 37,061 $ 56,062 Net realized gains from sale of investments. $ 15,007 $ 7,631 1. Basis of Presentation March 31,June 30, 2008 and the results of operations, comprehensive income and cash flows for the periods presented have been made. Operating results and cash flows for the threesix months ended March 31,June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.2. Recently Adopted Accounting Standards SFASStatement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.FASB’s long-term measurement objectives of the Financial Accounting Standards Board (“FASB”) for accounting for financial instruments.tax impacttaxes of $43.3 million, all of which related to applying the fair value option to fixed maturity and equity securities available for sale. This adjustment was reflected as a reclassification of accumulated other comprehensive income to retained earnings. Both the fair value and carrying value of such securities were $3.3 billion on January 1, 2008, immediately prior to the adoption of the fair value option.7MERCURY GENERAL CORPORATION & SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3. Fair Value of Financial Instruments 159 for the three months ended March 31, 2008: Three Months Ended
March 31,
2008 (Amounts in thousands) $ (364 ) (56,303 ) (36,620 ) $ (93,287 ) Three Months Ended Six Months Ended June 30, 2008 June 30, 2008 (in thousands) Short-term investments $ 51 $ (313 ) Fixed maturity securities (13,554 ) (69,857 ) Equity securities 36,077 (543 ) Total $ 22,574 $ (70,713 ) isare recognized on an accrual basis on each measurement date and isare included in net investment income in the Company’s consolidated statements of income.4. Fair Value Measurement 8MERCURY GENERAL CORPORATION & SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)March 31,June 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value: Quoted Prices in
Active Markets
for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Balance
as of
March 31,
2008 (Amounts in thousands) $ 31,354 $ — $ — $ 31,354 — 2,381,147 — 2,381,147 — 237,292 — 237,292 — 124,727 — 124,727 — 910 — 910 59,657 — — 59,657 23,350 — — 23,350 337,692 — — 337,692 — 25,448 — 25,448 252,485 — — 252,485 3,834 12,320 — 16,154 $ 708,372 $ 2,781,844 $ — $ 3,490,216 — 137,174 — 137,174 5,981 444 — 6,425 2,571 — — 2,571 $ 8,552 $ 137,618 $ — $ 146,170 9MERCURY GENERAL CORPORATION & SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Level 1) (Level 2) (Level 3) 2008 (in thousands) Assets Fixed maturity securities: U.S. government bonds and agencies $ 24,683 $ - $ - $ 24,683 Obligations of states and political subdivisions - 2,410,287 - 2,410,287 Mortgage-backed securities - 224,817 - 224,817 Corporate securities - 111,335 - 111,335 Redeemable preferred stock - 906 - 906 Equity securities: Common stock: Public utilities 62,497 - - 62,497 Banks, trusts and insurance companies 18,175 - - 18,175 Industrial and other 389,327 - - 389,327 Non-redeemable preferred stock - 23,144 - 23,144 Short-term investments 218,884 - - 218,884 Derivative contracts 4,932 7,242 - 12,174 Total assets at fair value $ 718,498 $ 2,777,731 $ - $ 3,496,229 Liabilities Notes payable - 131,837 - 131,837 Derivative contracts 6,337 - - 6,337 Other 9,289 - - 9,289 Total liabilities at fair value $ 15,626 $ 131,837 $ - $ 147,463 5. Stock-BasedShare-Based CompensationEffective January 1, 2006, theadoptedaccounts for share-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), using the modified prospective transition method. Under this transition method, share-based compensation expense includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting StandardsSFAS No. 123, “Accounting for Stock-Based Compensation.” Share-based compensation expense for all share-based payment awards granted or modified on or after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is the option vesting term of four or five years, for only those shares expected to vest. The fair value of stock option awards is estimated using the Black-Scholes option pricing model with the grant-date assumptions and weighted-average fair values.6. Accounting for Uncertainty in Income Taxes Effective January 1, 2007,Company adopted the Financial Accounting Standards Board (“FASB”)FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return related to uncertainties in income taxes. FIN No. 48 prescribes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in the financial statements. For a tax position that meets the recognition threshold, the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement is recognized in the financial statements.threesix months ended March 31,June 30, 2008. The Company does not expect any changes in unrecognized tax benefits within the next 12 months to have any significant impact on its consolidated financial statements. The Company recognizes interest and assessed penalties related to unrecognized tax benefits as part of income taxes.Company’sCompany's financial position. However, an unfavorable outcome may have a material impact on the Company’s results of operations in the period of such resolution.10MERCURY GENERAL CORPORATION & SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. Recently Issued Accounting Standards 8. Subsequent Event Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of OperationsGeneral$729$1,413 million of net written premiums in the first threesix months of 2008.76%77% of the Company’s net written premiums during the threesix months ended March 31,June 30, 2008 and 2007, respectively.In addition, theThe Illinois DOI is conducting a market conduct examination of the business written in Illinois in the 2007 underwriting year. No reports have yet been issued on these examinations.12 bringing the Company closemade an additional rate filing to bring its rates into full compliance with the new regulations. However, additional rate filingsthe Company cannot predict whether the California DOI will be required duringdetermine that the two year phase-in period to fully complyCompany’s rates are in full compliance with the new regulations.regulations as a result of this filing. In general, the Company expects that the regulations will cause rates for urban drivers to decrease and those for non-urban drivers to increase. These rate changes are likely to increase consumer shopping for insurance which could affect the volume and the retention rates of the Company’s business. It is the Company’s intention to maintain its competitive position in the marketplace while complying with the new regulations.21, 2008, the Commissioner of the California DOI issued a notice that he would file the proposed amendments, on an emergency basis, with the Office of Administrative Law (“OAL”) on or after April 26, 2008. On April 29, 2008, the Commissioner issued a new notice reflecting slight modifications to the proposed emergency regulations and superseding the prior version. These can be filed withThe proposed changes were approved as emergency regulations by the OAL on or after May 3, 2008. The Company is not able to predict whether the OAL will treat the amendments16, 2008 and became effective as appropriate for emergency action or when it will otherwise act on them. Because the actual administration of the regulations determines their practical impact, the Company is not able to predict how they will affect it upon enactment. In addition, the Company is aware that other companies are challenging the regulations. The Company is monitoring the progress of those challenges.In July 2007, the California DOI issued Orders to Show Cause and Statements of Charges and Accusations (the “OSCs”) alleging that the Company has engaged in and continues to engage in claims handling acts and practices in violation of California Insurance Code sections 790et seqand other regulations. The California DOI is seeking penalties for each violation. The California DOI is also seeking (a) a suspension of the California Companies’ Certificates of Authority for a period not to exceed one year for acts in violation of Section 700(c) and 704 of the California Insurance Code, (b) a finding that breaches of contract have occurred with a specification of the amount of actual damages sustained as a result of the breaches and (c) restitution on behalf of those allegedly harmed by the acts alleged in the OSCs. On August 10, 2007, the Company filed a Notice of Defense in response which generally and specifically denied the allegations of the OSCs. A hearing on the matter is tentatively set to commence on June 16, 2008. The Company is currently engaged in a settlement discussion with the California DOI. The Company does not believe that it has done anything to warrant any of the penalties or remedies sought by the California DOI.13 legal and regulatory matters described above. It is possible that the impact of some of the changes could adversely affect the Company and its operating results, however, the ultimate outcome is not expected to be material to the Company’s financial position.issueissues will ultimately be resolved in favor of the Company. However, there can be no assurance that the Company will prevail on this matter.Statement of Financial Accounting StandardsSFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”). Estimating loss reserves is a difficult process as many factors can ultimately affect the final settlement of a claim, and therefore, the reserve that is required. Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of repair materials and labor rates, among other factors, can each impact ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of 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, such as bodily injury claims. Inflation is reflected in the reserving process through analysis of cost trends and reviews of historical reserving results.thesecatastrophe losses, the Company determines claim counts based on claims reported and development expectations from previous catastrophes and applies an average expected loss per claim based on reserves established by adjusters and average losses on previous catastrophes.March 31,June 30, 2008, the Company recorded its point estimate of approximately $1,043$1,021 million in loss and loss adjustment expense reserves which includes approximately $309$299 million of incurred but not reported (“IBNR”) loss reserves. IBNR includes estimates, based upon past experience, of ultimate developed costs which may differ from case estimates, unreported claims which occurred on or prior to March 31,June 30, 2008 and estimated future payments for reopened claims. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date; however, since the provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provision.threesix months ended March 31,June 30, 2008, the Company reported positiveadverse development of approximately $5$17 million on the 2007 and prior accident years’ loss and loss adjustment expense reserves which at December 31, 2007 totaled approximately $1.1 billion. The loss development included approximately $5$16 million of negative development from the California operations and approximately $10$1 million of positivenegative development from the operations outside of California. The negative development from California operations resulted primarily from increases in the personal automobile loss severity estimates for the 2007 accident15year. The positive development from operations outside of California came primarily from Florida and New Jersey operations. The development was largely the result of decreases in loss severity estimates, particularly in the bodily injury coverage, for the 2007 and prior2006 accident years.PremiumsInvestments9%0.4% of the carrying value of those securities.securities at June 30, 2008. The primary cause of the losses in fair value of equity securities was the overall decline in the stock markets, which saw a 10% decline of approximately 13% in the S&P 500 index during the quarter.six months ended June 30, 2008. For fixed maturity securities, the net loss represents approximately 2%2.5% of the carrying value of these securities. The Company believes that the primary causecauses of the majority of the losses in fair value onof fixed maturity securities is a decline inare ongoing downgrades of municipal bond prices resulting from liquidity problemsinsurers, widening credit spreads, and declines in the overall municipal bond markets and credit downgrades or negative outlooks for several municipal bond insurers.values of benchmark U.S. Treasury bonds. The Company intends to hold the majority of its municipal bonds to collect the full principal amount at maturity.March 31,June 30, 2008 is based on observable market prices, observable market parameters, or is derived from such prices or parameters. The availability of observable market prices and pricing parameters can vary from product to product.across different financial instruments. Observable market prices and pricing parameters in a productfinancial instrument (or a related product)financial instrument) are used to derive a price without requiring significant judgment. The Company’s financial instruments include securities issued by the U.S. government and its16agencies, securities issued by states and municipalities, certain corporate and other debt securities, corporate equity securities, and exchange traded funds. The fair value of these products is based principally on observable market prices or is derived using observable market parameters. These products generally do not entail a significant degree of judgment in determining fair value because actively quoted prices or observable pricing parameters are available.product.financial instrument. These techniques could involve some degree of judgment. The price transparency of the particular productfinancial instrument will determine the degree of judgment involved in determining the fair value of the Company’s financial instruments. Price transparency is affected by a wide variety of factors, including, for example, the type of product,financial instrument, whether it is a new productfinancial instrument and not yet established in the marketplace, and the characteristics particular to the transaction. ProductsFinancial instruments for which actively quoted prices or pricing parameters are available or for which fair value is derived from actively quoted prices or pricing parameters will generally have a higher degree of price transparency. By contrast, productsfinancial instruments that are thinly traded or not quoted will generally have diminished price transparency. Even in normally active markets, the price transparency for actively quoted instruments may be reduced for periods of time during periods of market dislocation. Alternatively, in thinly quoted markets, the participation of market-makers willing to purchase and sell a productfinancial instrument provides a source of transparency for products that otherwise are not actively quoted or during periods of market dislocation.17II—II - Other Information of this Quarterly Report on Form 10-Q.March 31,June 30, 2008 compared to Three Months Ended March 31,June 30, 2007firstsecond quarter of 2008 decreased approximately 4.6%5.7% from the corresponding period in 2007. Net premiums written in the firstsecond quarter of 2008 decreased approximately 7.2% from the corresponding period in 2007. Net premiums written by the Company’s California operations were $575.6$535.3 million in the firstsecond quarter of 2008, a 4.2%5.7% decrease over the corresponding period in 2007. Net premiums written by the Company’s non-California operations were $153.7$148.9 million in the firstsecond quarter of 2008, a 16.9%12.2% decrease over the corresponding period in 2007. The decrease in net premiums written is primarily due to a decrease in the number of policies written reflecting the recent soft market conditions.earned for the quarters ended March 31, 2008 and 2007: Three Months Ended March 31, 2008 2007 (Amounts in thousands) $ 729,266 $ 785,883 (8,350 ) (30,131 ) $ 720,916 $ 755,752 Three Months Ended June 30, 2008 2007 (in thousands) Net premiums written $ 684,177 $ 737,394 Decrease in unearned premiums 27,027 16,682 Net premiums earned $ 711,204 $ 754,076 firstsecond quarter (loss and loss adjustment expenses related to premiums earned) was 67.1%68.8% in 2008 and 67.5%66.9% in 2007. There was positive development of approximately $5 million and negative development of approximately $13$9 million and approximately $1 million on prior accident years’periods’ loss reserves for the quarters ended March 31,June 30, 2008 and 2007, respectively. Excluding the effect of prior accident years’periods’ loss development, the loss ratio in the firstsecond quarter was 67.8%67.6% in 2008 and 65.7%66.8% in 2007. The increase in the loss ratio excluding the effect of prior accident years’periods’ loss development is primarily due to higher lossseverity, which was partially offset by lower frequency, and severity in the California automobile lines of business, partially offset by higher average premiums earned per policy.firstsecond quarter (policy acquisition costs and other expenses related to premiums earned) was 28.3%28.2% in 2008 and 27.0%27.1% in 2007. The increase in the expense ratio is largely reflective of costs such as payroll and benefits that have not declined in proportion to the declines in premium volumes thus causingvolumes. In addition, an increase in technology-related expenses and advertising, as well as the establishment of the product management function, contributed to the higher expense ratio. This is particularly true in states outside of California which have seen net earned premiums decline by approximately 14%.1895.4%97.0% in the firstsecond quarter of 2008 compared with 94.5%94.0% in the corresponding period of 2007, which indicates that the Company’s underwriting performance contributed $33.0$21.0 million and $41.4$45.4 million to the Company’s results of operations before income taxes for the quarters ended March 31,June 30, 2008 and 2007, respectively.firstsecond quarter of 2008 was $39.3$39.0 million, compared with $42.1$40.8 million in the firstsecond quarter of 2007. The after-tax yield on average investments (fixed maturities and equities valued at cost) was 3.9%4.0% in the firstsecond quarter of 2008 compared to 4.2%4.1% in the corresponding period of 2007 on average invested assets of $3.5 billion and $3.4 billion, respectively. The slight decrease in after-tax yield is due to the absence of a large one-time special dividend received on an equity investmentdecrease in the first quarter 2007 and lower overall yields earned on new purchases that were made primarily throughout 2007.Income tax benefit in the first quarter of 2008 was $15.1 million, compared with income tax expense of $21.0 million in the first quarter of 2007. The change is largely due to a tax benefit of approximately $33 million that was recognized in the quarter ended March 31, 2008 related to changes in the fair value of fixed maturity and equity securities measured at fair value in accordance with SFAS No. 159.Net loss for the first quarter 2008 of $4.0 million, or $0.07 per share (diluted), compares with net income of $60.5 million, or $1.10 per share (diluted), in the corresponding period of 2007. Basic earnings per share was $(0.07) in the first quarter of 2008 and $1.11 in the first quarter of 2007.short-term interest rates.(loss)/income are net realized investment losses,gains, net of tax, of $59.9$23.7 million in the firstsecond quarter of 2008 compared with net realized investment losses,gains, net of tax, of $0.7$6.5 million forin the same period in 2007. Net realized investment losses,gains, net of tax, in the firstsecond quarter 2008 of $59.9$23.7 million include losses,includes gains, net of tax, of $60.6$14.7 million due to changes in the fair value of fixed maturity and equity securities measured at fair value pursuant to SFAS No. 159. The primary causesThese gains largely resulted from the price appreciation on the Company’s equity holdings during the second quarter of these losses in fair value were a large decline in2008 recovering most of the overall stock markets which saw the S&P 500 index decline by approximately 10%price declines on such holdings experienced during the first quarter of 2008.a decline in municipal bond prices resulting from liquidity problems2007.overall municipal bond marketscorresponding period of 2007. Basic earnings per share was $1.29 in the second quarter of 2008 and credit downgrades or negative outlooks for several municipal bond insurers.firstsecond quarter of 2008 was $55.9$47.0 million, down 8.5%25% from the prior year quarter largely due to a decrease in premiums earned reflecting the recent soft market conditions and higher loss severity as a result of inflation, leading to a higher combined ratio andratio. In addition, a decrease in after-taxnet investment income resulting from lower investment yields.measure. Three Months Ended March 31, 2008 2007 (Amounts in thousands) $ 55,928 $ 61,130 (59,889 ) (677 ) $ (3,961 ) $ 60,453 Three Months Ended June 30, 2008 2007 (in thousands) Operating income $ 47,004 $ 63,016 Net realized investment gains, net of tax 23,722 6,493 Net income $ 70,726 $ 69,509 Six Months Ended June 30, 2008 2007 (in thousands) Net premiums written $ 1,413,443 $ 1,523,277 Decrease (increase) in unearned premiums 18,677 (13,449 ) Net premiums earned $ 1,432,120 $ 1,509,828 Six Months Ended June 30, 2008 2007 (in thousands) Operating income $ 102,932 $ 124,146 Net realized investment (losses) gains, net of tax (36,167 ) 5,816 Net income $ 66,765 $ 129,962 threesix months of 2008 was $32.2$12.9 million, a decrease of $20.5$102.4 million over the same period in 2007. This decrease was primarily due to lower premiums collected during the first six months of 2008 coupled with higher losses and loss adjustment expenses paid in relation to premiums collected during the first three months of 2008 compared with the same period in 2007. The Company has utilized the cash provided from operating activities primarily for its investment in fixed19$298.8$454.9 million were reinvested, mostly in highly-rated fixed maturity securities.$303.0$262.1 million at March 31,June 30, 2008. 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.March 31,June 30, 2008: Fair Value (Amounts in thousands) $ 31,354 2,381,147 237,292 124,727 910 2,775,430 59,657 23,350 337,692 25,448 446,147 252,485 $ 3,474,062 Fair Value (in thousands) Fixed maturity securities: U.S. government bonds and agencies $ 24,683 States, municipalities and political subdivisions 2,410,287 Mortgage-backed securities 224,817 Corporate securities 111,335 Redeemable preferred stock 906 2,772,028 Equity securities: Common Stock: Public utilities 62,497 Banks, trusts and insurance companies 18,175 Industrial and other 389,327 Non-redeemable preferred stock 23,144 493,143 Short-term cash investments 218,884 Total investments $ 3,484,055 threesix months of 2008, the Company recognized approximately $92.1$55.6 million in net realized investment losses which included a loss of approximately $95.4$72.2 million ($62.046.9 million after taxes) related to the change in the fair value of total investments.March 31,June 30, 2008, the average rating of the $2,774.5$2,771.1 million bond portfolio at fair value was AA, unchanged from December 31, 2007. Bond holdings are broadly diversified geographically, within the tax-exempt sector. Holdings in the taxable sector consist principally of investment grade issues. At March 31,June 30, 2008, bond holdings rated below investment grade totaled $42.6$39.0 million at fair value representing approximately 1.2%1.1% of total investments. This compares to approximately $47.7 million at fair value representing approximately 1.3% of total investments at December 31, 2007.quarterhalf of 2008, the investment market has experienced substantial volatility as a result ofdue to uncertainty in the credit markets. As a result, some asset classes have had liquidity strain and/or valuation issues, including mortgage-backed securities (“CMO”), privately insured municipal bonds, and adjustable rate short-term securities.$18$21 million and $20 million, at fair value, of Alt-A CMO’s at March 31,June 30, 2008 and December 31, 2007, respectively. Alt-A mortgages are generally home loans made to individuals that have credit scores as high as prime borrowers, but provide less documentation of their finances on their credit applications. All of the Company’s Alt-A CMO’s are currently rated AAA and the overallaverage rating of the entire CMO portfolio is AAA. The valuation of these securities is based on level 2 inputs that can be observed in the market.20March 31,June 30, 2008. Approximately half of the municipal bonds do not carry insurance from bond insurers and have an average rating of A. The other half of the municipal bond positions are insured by bond insurers. The following bond insurers each insured more than one percent of the Company’s municipal bond portfolio at March 31,June 30, 2008: MBIA-16.2%MBIA: 17.0%, FSA-10.3%FSA: 9.9%, FGIC-9.3%FGIC: 9.7%, AMBAC-8.8%AMBAC: 9.3%, and XLCA-2.0%XLCA: 2.0%.of bonds prior to maturity, of bonds that have declined in market value due to the bond insurers’ rating downgrades.March 31,June 30, 2008, short-term cash investments consisted of highly rated short duration securities redeemable on a daily or weekly basis. The Company does not have any material direct equity investment in subprime lenders.insurer’sinsurer's annual net premiums written to statutory policyholders’policyholders' surplus should not exceed 3 to 1. Based on the combined surplus of all of the licensed insurance subsidiaries of $1.7$1.8 billion at March 31,June 30, 2008 and net written premiums for the twelve months ended on that date of $2.9 billion, the ratio of writings to surplus was approximately 1.71.6 to 1.March 31,June 30, 2008 was $33.37$34.09 per share.Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures 21Item 1. Legal Proceedings Sam Donabedian, individually and on behalf of those similarly situated v. Mercury Insurance Company, et al., was originally filed on April 20, 2001 in the Los Angeles Superior Court, asserting, among other things, a claim that the Company’s calculation of persistency discounts to determine premiums is an unfair business practice, a violation of the California Consumer Legal Remedies Act (“CLRA”) and a breach of the covenant of good faith and fair dealing. The Company originally prevailed on a Demurrer to the Complaint and the case was dismissed; however, the California Court of Appeal reversed the trial court’s ruling, deciding that the California Insurance Commissioner does not have the exclusive right to review the calculation of insurance rates/premiums. Additionally, over the Company’s objection, on May 9, 2005, the trial court permitted The Foundation for Taxpayer and Consumer Rights (“FTCR”) to file a Complaint in Intervention to allege that the Company’s calculation of persistency discounts constitutes a violation of insurance Code Section 1861.02(a) and (c). The parties reached a settlement in late 2007, which was approved by the Court on December 14, 2007. The Court also considered FTCR’s request for attorney’s fees and took the matter under submission. Prior to the Court’s ruling on the matter, the Plaintiff agreed to reduce its $1,575,000 in agreed upon fees by $250,000, payable to FTCR, and the Company agreed to give FTCR an additional $250,000 for a total payment of attorneys’ fees by the Company to Plaintiffs’ counsel of $1,325,000 and to counsel for FTCR of $500,000 with any additional fees claimed by FTCR to come from any monies that remain available in the guaranteed $5 million that the Company has committed in the settlement after redemption of coupons issued to class members. The attorneys’ fees have now been paid to class counsel and FTCR. Mercury has mailed the coupons to members of the class who now have two years in which to redeem the coupon.FinalA final approval of the settlementhearing is expected to occur in the third quarter ofscheduled for September 16, 2008. The ultimate outcome of this matter is not expected to be material to the Company’s financial position.22California State Board of Equalization (“SBE”)SBE upheld Notices of Proposed Assessments issued against the Company for tax years 1993 through 1996 in which the California Franchise Tax BoardFTB disallowed a portion of the Company’s expenses related to management services provided to its insurance company subsidiaries. As a result of this ruling, the Company recorded an income tax charge (including penalties and interest) of approximately $15 million, after federal tax benefit, in the first quarter of 2006. On April 24, 2007, the Company filed a complaint in the Superior Court for the City and County of San Francisco challenging the SBE decision and seeking recovery of the taxes, penalties and interest paid by the Company as a result of the SBE decision. The trial has commenced on April 29,On July 1, 2008, the Court held in favor of the Company in the case and is currently in process. The Company believesconcluded that the deductionCompany is entitled to a refund of California franchise tax in the expenses related to management servicesamount of $22,438,826 plus interest thereon as provided to its insurance company subsidiaries is appropriate and intends to vigorously prosecute the case.InRobert Krumme, On Behalf Of The General Public v. Mercury Insurance Company, Mercury Casualty Company, and California Automobile Insurance Company (Superior Courtby law. After accounting for the City and County of San Francisco), the Court issued a modified injunction on July 11, 2005 that, among other things, requiredfederal taxes, the Company expects to accept applications for insurance from any California licensed broker with limited exceptions, restrictedrecord a tax benefit of approximately $15 million in the usethird quarter of broker manuals and communications with brokers2008. However, the ruling may be appealed by the Company’s field personnel, and required the Company to compensate brokers at the same rate based on volume of sales. The Company has implemented changes to its operations and believes that it is in compliance with the modified injunction. At the time the injunction was issued, the Court stated that it would consider vacating the modified injunction following a one year period of review of the changes in the Company’s operations. On March 2, 2007, the Company filed a motion seeking to vacate the modified injunction. At the hearing, the Court ordered that counsel be permitted to conduct a further limited investigation and to file a report for further consideration by the Court. The Company is unable to determine whether the modified injunction will be vacated or estimate the impact of the Court’s decision regarding the modified injunction on future trends in earnings or loss ratios.FTB.Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None NoneItem 3. Defaults Upon Senior Securities None NoneItem 4. Submission of Matters to a Vote of Security Holders NoneNominee Number of Shares Number of Shares Voted For Withheld Nathan Bessin 40,774,495 2,468,929 Bruce A. Bunner 42,283,836 959,588 Michael D. Curtius 42,051,961 1,227,463 Richard E. Grayson 41,891,302 1,352,122 George Joseph 41,833,729 1,409,696 Charles E. McClung 42,059,407 1,184,017 Donald. P. Newell 41,858,507 1,384,917 Donald R. Spuehler 41,841,206 1,402,218 Gabriel Tirador 42,319,187 924,237 Number of Shares Number of Shares Number of Shares Voted For Voted Against Abstained 41,086,366 1,946,200 210,857 Item 5. Other Information None NoneItem 6. Exhibits 15.1 Letter Regarding Unaudited Interim Financial Information 15.2 Awareness Letter of Independent Registered Public Accounting Firm 31.1 Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being 23furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. 32.2 Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. SIGNATURESMERCURY GENERAL CORPORATIONDate: May 8,August 6, 2008By: /s//s/ Gabriel Tirador Gabriel Tirador Gabriel TiradorPresident and Chief Executive Officer Date: May 8,August 6, 2008By: /s//s/ Theodore Stalick Theodore Stalick Theodore StalickVice President and Chief Financial Officer