MERCURY GENERAL CORP
MANAGEMENT AGREEMENT 10.40
<DOCUMENT>
<TYPE>EX-10.40
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>MANAGEMENT AGREEMENT 10.40
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.40

                             MANAGEMENT AGREEMENT
                             --------------------

     This Agreement is entered into by and between MERCURY INDEMNITY COMPANY OF
ILLINOIS, (hereinafter referred to as Insurer), and MERCURY INSURANCE SERVICES,
LLC (hereinafter referred to as Manager).

     In consideration of the promises, conditions and covenants herein
contained, the parties agree as follows:

                                   SECTION I

                                EFFECTIVE DATE
                                --------------

This Agreement shall become effective January 1, 2001.

                                  SECTION II

                          CONDITIONS OF EFFECTIVENESS
                          ---------------------------

     The Agreement or any amendment thereto shall become effective only if the
following shall have first occurred:

     A.  The Illinois Department of Insurance, if required, shall have approved
     of and/or acknowledged in writing this Agreement or any amendment thereto;
     and

     B.  The boards of directors of the Manager and the Insurer shall have
     approved this Agreement by a majority vote

                                  SECTION III

                            SERVICES AND FACILITIES
                            -----------------------

     A.  Commencing on the Effective Date and until the termination of this
     Agreement, the Manager shall provide the services and facilities as are
     described hereunder to the Insurer. Such services and facilities as are
     provided hereunder shall be subject to the control and approval of the
     Board of Directors of the Insurer, and shall be performed in the manner and
     for the consideration set forth herein by the Manager, and such services
     shall be performed in accordance with applicable laws and regulations in
     all of the jurisdictions in which the Insurer conducts business. It is
     recognized that the Insurer may be governed by laws and regulations which
     are particularly applicable to its business and this Manager, by virtue of
     this Agreement, recognizes its responsibility to perform in accordance with
     such laws or regulations including, but not limited to, compliance with any
     order or orders issued by any governmental agency affecting the Insurer;
     and the Manager hereby acknowledges that in such case it will immediately
     conform to same in the performance of its services as hereinafter set
     forth. The Board of Directors of the Insurer shall retain responsibility
     for the performance of services provided pursuant to

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     this Agreement by the Manager and, in connection therewith, shall require
     the Manager to perform in accordance with the standards of performance set
     forth herein.

     B.  The Manager promises to manage the Insurer, and to conduct on its
     behalf any and all duties of management as shall be necessary for the
     complete operation of the Insurer.

     C.  The Insurer hereby delegates to the Manager all of the duties of
     management which it is allowed to so delegate by the laws of the State of
     Illinois, including but not limited to the following duties: to issue and
     underwrite insurance policies, which the Insurer may be so authorized to do
     by law, in accordance with the rules and regulations as delineated in the
     underwriting manuals of the Insurer, settle and adjust any and all losses
     and claims, defend lawsuits, establish premium rates, establish and choose
     sales agents and brokers, determine agents' and brokers' commissions,
     prepare the records necessary for the conduct of the insurance business,
     furnish all forms, supplies and agents' manuals necessary for the conduct
     of the insurance business.

     D.  The Manager promises to perform all of the operating functions on
     behalf of the Insurer, including but not be limited to the following:

         1.  To acquire, license and appoint sales agents and brokers for the
         production of the insurance business of and for the Insurer, provided
         that the Insurer shall retain the right to refuse the appointment of
         any agent or broker and the right to terminate any agent or broker.

         2.  To issue and underwrite policies on behalf of the Insurer and to
         choose and obtain the necessary applications and policy forms.

         3.  To furnish for the Insurer all of the operating forms, printing
         supplies, agents' manuals and any other related items which may become
         necessary for the operation of the insurance business.

         4.  To provide all personnel reasonably required by the Insurer and to
         fill all such positions in the Insurer with the advice and consent of
         the Board of Directors of the Insurer, all of which personnel shall be
         compensated exclusively by the Manager.

         5.  To provide all facilities necessary for the conduct of the
         Insurer's business, including but not limited to real estate, office
         space and personal property, including furniture, fixtures and
         equipment. The office space, furniture, fixtures and equipment utilized
         by the Insurer in the conduct of its business may be owned or leased by
         the Manager or the Insurer.

         6.  To pay on behalf of the Insurer all of its operating expenses,
         including but not limited to rent, supplies, salaries of all personnel,
         telephone, advertising costs, costs of settling and adjusting all
         insurance claims, legal defense costs, court

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         costs, costs of loss analysis, accounting costs (other than auditing),
         and premium collection costs; provided, however, that the Insurer shall
         pay, and be responsible for, the costs of management fees, premium
         taxes, losses, reserves for unpaid losses, reserves for unpaid loss
         adjustment expense, audit fees, assigned risk or similar assessments,
         bureau fees, Fair Plan or similar assessments, directors' fees, agents'
         commissions, reinsurance premiums, outside investment counsel fees,
         assessments by the Illinois Insurance Guaranty Fund or similar state
         guaranty funds, membership fees in trade associations, any assessments
         by such associations, political contributions (to the extent not
         prohibited by applicable laws), premiums paid for insurance policies in
         which the Insurer is the beneficiary and owner, such as fidelity bonds,
         taxes of all types and costs which may be levied on insurance companies
         by the governmental authorities having jurisdiction over the same, and
         agents' bonuses (contingency commissions).

     D.  The Manager promises to deposit all premiums received directly into a
     bank account of the Insurer.

     E.  The Manager shall make all books, records and documents pertaining to
     the Insurer's business available to the Illinois Director of Insurance or
     his designees.

     G.  Without limiting the generality of the foregoing provisions regarding
     the duties of the Manager, the Manager hereby expressly agrees to take all
     steps necessary to preserve the Insurer's exemption from the privilege tax
     imposed by Section 409 of the Illinois Insurance Code, including but not
     limited to:

         1.  Maintaining the Insurer's principal place of business within the
         State of Illinois;

         2.  Maintaining within the State of Illinois officers and personnel
         knowledgeable of and responsible for the Insurer's operation, books,
         records, administration, and annual statement;

         3.  Conducting within the State of Illinois substantially all
         underwriting, policy issuing, and servicing relating to the Insurer's
         Illinois policyholders; and

         4.  Complying with the provisions of Section 133(2) of the Illinois
         Insurance Code.

     H.  This Agreement is not intended to supersede or replace the policy
     making decisions of or the supervisory responsibilities of the Board of
     Directors of the Insurer.  Nor it is intended that substantial control of
     the Insurer or of any of the powers vested in the Board of Directors, a
     committee thereof or agents appointed by said Board of Directors, shall
     have the right, at all times, to cause the books and records of the Manager
     to be inspected and/or audited as they relate to the business of the
     Insurer.

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                                  SECTION IV

                         INVESTMENT ADVISORY SERVICES
                         ----------------------------

     The Manager agrees to act as investment advisor to the Insurer with respect
to the investment of the Insurer's assets, and, in general, to supervise the
investment and reinvestment of cash, securities or other property comprising the
assets of the Insurer, subject at all times to the direction and control of the
Board of Directors (or responsible committee thereof) of the Insurer, all as
more fully set forth herein.

     In connection with the Manager's performance of investment advisory
services for the Insurer, the following provisions shall apply:

     A.  The Insurer shall at all times maintain a custodian (referred to
     hereinafter as the "Custodian") for its securities and appropriate bank or
     custodial accounts for the purpose of handling cash involved in the
     Insurer's investment transactions.

     B.  The Manager shall obtain and evaluate pertinent information about
     significant economic developments and gather statistical and financial data
     affecting the investments of the Insurer and such investments which the
     Manager considers may be suitable for inclusion in the Insurer's investment
     portfolio.

     C.  At mutually agreeable intervals, the Manager shall furnish reports to
     the Investment Committee of the Insurer setting forth (i) a list of the
     Insurer's securities, showing the costs, market value, maturity date and
     other pertinent information regarding each such security, (ii) a summary of
     the investment transactions effected on behalf of the Insurer since the
     closing date of the preceding report, and (iii) the Manager's
     recommendations as to what securities should be acquired or sold in light
     of prevailing economic and securities market conditions.

     D.  After reviewing the Manager's periodic investment reports, the
     Investment Committee of the Insurer will advise the Manager which of the
     Manager's investment recommendations it has accepted or rejected. If the
     Manager is notified in writing of the Insurer's acceptance of the Manager's
     recommendations, such notification shall constitute authorization to the
     Manager to effect the recommended investment transactions.

     E.  All investment transactions authorized by the Insurer's Investment
     Committee shall be carried out by the Manager through the Custodian, but
     the Manager may designate a broker or brokers to carry out said
     transactions. All instructions or directions of the Manager to the
     Custodian shall, unless otherwise agreed to by the Manager and the
     Custodian, be made in writing, or orally and confirmed in writing as soon
     as practicable thereafter, and the Manager shall instruct all brokers,
     dealers or other persons executing investment orders to forward to the
     Custodian copies of all brokerage or dealer confirmations promptly after
     execution of all transactions.

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     F.  The Manager is authorized to enter into an agreement with the Custodian
     to use the Depository Trust Company's Institutional Delivery System for
     trade confirmation and settlements.

     G.  The Insurer shall notify its Custodian of the appointment of the
     Manager as investment advisor by delivering a copy of this Agreement to its
     Custodian.

     H.  It is understood and agreed that the Manager's services in recommending
     investments shall be advisory only, and shall not in any way be deemed a
     delegation by the Insurer or its Board of Directors of their fiduciary
     powers, discretion or judgment in the selection, retention or disposition
     of any investments.

     I.  The investment advisory services provided by the Manager under this
     Section, and all actions taken hereunder by it, shall at all times conform
     to the requirements imposed by the insurance laws and regulations of the
     State of Illinois, including, but not limited to, Article VIII regarding
     allowable investments for domestic insurance companies and Section 133 as
     it pertains to the keeping of securities in Illinois.

                                   SECTION V

                                 COMPENSATION
                                 ------------

     As compensation for the services to be provided by the Manager under this
Agreement, the Manager shall be reimbursed monthly for all expenses incurred on
behalf of the Insurer in providing personnel, facilities and services
contemplated by this Agreement.

                                  SECTION VI

                             OWNERSHIP OF RECORDS
                             --------------------

     The ownership and legal title to the insurance policies, insurance policy
records, data processing tapes, disks, programs and documentation, and account
records of the Insurer, compiled on behalf of the Insurer by the Manager, shall
remain in and with the Insurer. However, the Manager shall have joint custody
with the Insurer of said records.

                                  SECTION VII

                               TERM OF AGREEMENT
                               -----------------

     A.  Except as provided in paragraphs B and C below, this Agreement shall be
     in effect until terminated by either party upon ninety (90) days prior
     written notice to the nonterminating party.

     B.  The Insurer may terminate its participation under this Agreement
     immediately in the event that:

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         (1)  The Manager shall have defaulted in the performance of any
         obligation under this Agreement and shall have failed to remedy within
         30 days of receipt of written notice thereof from the Insurer asserting
         such default as grounds for termination of this Agreement; or

     C.  The Manager may terminate its obligations to the Insurer under this
     Agreement immediately in the event that:

         (1)  The Insurer shall have defaulted in the performance of any
         obligation under this Agreement and shall have failed to remedy such
         default within 30 days of receipt of written notice thereof from the
         Manager asserting such default as grounds for termination of this
         Agreement: or

         (2)  The Insurer is dissolved or determined insolvent.

IN WITNESS WHEREOF, we have set our hands and seals this 10th day of January,
2001.

MERCURY INDEMNITY COMPANY               MERCURY INSURANCE SERVICES,
   OF ILLINOIS                              LLC


By: /s/ Cooper Blanton                  By: /s/ George Joseph
   ------------------------------          -----------------------------
     Cooper Blanton, President               George Joseph, President

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