Marty Becker – Chairman, Chief Executive Officer
Joe Roberts – Executive Vice President, Chief Financial Officer
Jim Tees – Executive Vice President, Chief Risk Officer
Chuck Hamilton - FTN Midwest
Susan Spivak - Wachovia
Dan Farrell - Fox Pitt
Mark Dwelle- Ferris Baker Watts
Mark Serfin - Citadel
Jason Busell - Philadelphia Financial
Max Capital Group Ltd. (MXGL) Q4 2007 Earnings Call February 13, 2008 10:00 AM ET
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Max Capital Group, Ltd. Earnings Conference Call. My name is Angelica; I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference. (Operator Instructions).
Now the company reminds you that forward-looking statements that may be made in this call are intended to be covered in the Safe Harbor provision of the Private Securities Litigations Reform Act of 1995. Forward-looking statements are not statements of historical fact, but rather reflect the Company's current expectations, estimates and predictions about future result and are subjects to risks, uncertainties and assumptions including risks, uncertainties, and assumption that are enumerated in the Company's most recent Form 10-K and other documents filed with the SEC. If one or more risks or uncertainties materialize or if the Company's underlying assumptions proved to be incorrect, actual results may vary materially from what the Company projects. The company undertakes no obligation to update publicly or advise any forward-looking statement whether as the result of new information, future events or otherwise.
I would now like to turn the presentation over to your host for today's call, Mr. Marty Becker, Chief Executive Officer. Please proceed sir.
Marty Becker – Chairman, Chief Executive Officer
Thank you very much Angelie and good morning and welcome to Max Capital's fourth quarter and year-end earning call. 2007 was a very good year for Max and perhaps the best year in our short eight year history. The specialty insurance, re-insurance business model, Max has successfully pursued over the past five years, coupled with our diversified investment strategies served all our stakeholders very well as some of our key indicators demonstrate.
Gross written premiums totaled nearly 1.1 billion including 302 million of our life reinsurance premium, up 24.6% from 2006. Our property and casualty combined ratio was 83.9% and our reinsurance business and 86.2% and our insurance business excluding the cost associated with the launch of Max Specialty this year.
Net operating income for fully diluted share was $1.1 for the fourth quarter and 481 for the year. I would note, we chose not to report a deferred tax asset on Max Specialty's losses for the quarter and year until that operation is closer than it currently is to operational maturity. This decision on our part impacted fourth quarter and full year net income by $0.07 per share.
Our net operating return on average shareholders equity was Max's best ever at 20.7%. For our shareholder, book value per share including dividends received increased by 20.9% for the 2007 year. And our alternative asset portfolio had an exceptionally good year returning 16.78% versus our target of 8% and our trailing 5 year average of 10.98%.
As I noted in a recent letter to Max's shareholders, employees and other constituents, these are excellent results in any environment and bodes well for the company in 2008 and future years. Additionally Max in 2007 repurchased just under 4.3 million shares representing 7.1% of our shares outstanding as of January 1, last year at an average cost of $26.66 per share.
We announced at year-end of 50 million accelerated share repurchase program commencing in early January 2008 and we expect to complete that program by the end of the first quarter. Additionally, immediately, following the exercise of warrants by one of Max's original shareholders this month, we purchased the resulting shares. This repurchase totaled 1,31,178 shares at a price of $28.77. And Jim Tees will provide more information on these actions later on this call. As long as the market place continues to undervalue, in our opinion, the consistency and magnitude of Max's ability to grow book value per share, we intend to continue to be prudent re-purchasers of our stock.
In the article about our industry these days seems to discuss the declining rate environment of pricing for underwriting risk in virtually all classes of business for 2008. With January 1st now behind as we would concur from own experience, but as we follow such broad statements, the details do vary by class and account.
Our Bermuda and Dublin platforms for both insurance and reinsurance were down 11.2% in gross written premium in 2007 compared to 2006, part of this was premium adjustments on our reinsurance book of business, but the balance was the result of an increasingly competitive market place.
While reinsurance pricing has generally been far more than insurance, primary companies have been adjusting their attachment points to retain more premium and therefore lowering gross written premium.
In our insurance book, competition has increased each quarter over the past year. On average our retained accounts had price reductions ranging from 5 to 15%. Business that we have not retained typically was offered price reduction significantly exceeding 20%.
For 2008, we expect gross written premiums for these two operations to be relatively flat, while prices were likely to continue to decline somewhat. We expect to offset that trend with the new product segments and new players we have added over the past year, as well as new business that has largely replaced loss business.
Our new US excess and surplus lines platform Max Specialty will have its first full year of operation in 2008. As, we dug out the platform in 2007, we added to an initial team that was principally focussed on property and contract binding business by recruiting a proven team of inland marine ocean cargo producers, as well as forming a new MGU Max Managers focussing on the specialty casualty business. Both of these newer actions had only nominal impact on 2007 results, but should have greater impact in 2008.
Our life reinsurance business had a very strong fourth quarter and year. It's $302 million for the year was its best performance since inception. You may recall that this business is essentially a loss portfolio transfer business, where we purchase already written blocks of policies from a seating carrier. Because it is all previously written business it enables very thorough underwriting. The seating carriers typically looking for surplus relief to enable its production force to write more business or it may be the divestiture of discontinued line of business.
The opportunity for Max is largely the spread, we feel we can make on the invested assets. All of our business is priced in this segment at a return on equity or allocated capital of 15% or more, because of the long duration of these liabilities we allocate 40% of their invested assets to our alternative portfolio and price with a targeted return objective of 8%.
In an investing out performance year like 2007, the returns on this segment are extremely attractive. Our life business is a nice enhancement to our overall invested asset and enjoys a pricing environment un-correlated to the property and casualty pricing cycles.
Much of the financial community over the past couple of quarters has been severely impacted by the criss in the sub-prime mortgage sector. I am pleased to note that as we have previously indicated Max exposure to that asset class is minimal. We are adding some additional detail to our 10-K and year-end investor presentation.
On the exposure we have to sub-prime an Alt-A mortgages in our portfolio. All such securities we do have remained principally AAA or AA rated. The current mark-to-market on our year end $58 million of sub-prime bonds is little over $54 million. And additionally, we have $49 million of Alt-A securities with a mark-to-market of almost $49 million down $300,000.
We continue to expect no losses on our investment portfolios from these securities. More recently, the questions we have been receiving are about any exposure we may have in our liability book related to sub-prime.
For unrelated reasons, Max significantly reduced its D&O writings, insurance, and reinsurance in 2005. We do write some D&O reinsurance business as well as an insurance professional liability book.
We conservatively estimate our net loss provisions as of December 31, 2007, to be approximately 10 million and 8 million in our insurance and reinsurance businesses respectively. These estimates are well within our original loss estimates for those loans and no additional reserves were recorded for sub-prime losses during the year. We believe that any future development will not have a meaningful impact on net income because of the reinsurance in retrocessional protection in place for these risks by Max.
To conclude and sum up 2007 was a very active, but a very good year for Max Capital. As we enter 2008, we continue to build an attractively diversified specialty insurance and re-insurance company. Our primary objectives remain to consistently grow book value per share and to thereby build the value of Max for our shareholders and reward them for their confidence in us.
I'd now like to turn it over to Joe Roberts, Max's Chief Financial Officer. Joe.
Joe Roberts – Executive Vice President, Chief Financial Officer
Thank you Marty and good morning everyone. Our fourth quarter was a another good one for Max Capital where we generated net income of $62.4 million or $1 per diluted share compared to net income of 95.4 million or $1.50 per diluted share for the same period in 2006.
Operating income, which excludes the impact of net realized gains and looses on fixed maturity investments was 63.4 million or $1.01 per diluted share for the fourth quarter versus 93.9 million or $1.48 per diluted share for the same period in 2006. The decrease in net operating income per diluted share of 32% principally reflects lower alternative investments returns in the fourth quarter of 2007 versus 2006.
For the year ended December 31, 2007 we produced net operating income of $307.2 million or $4.81 per diluted share versus $222.7 million or $3.52 per diluted share for the same period in 2006, representing an increase in net operating income per diluted share for the year of 38% with a principal contributor to the increase being our improved alternative investment performance year-over-year.
Book value grew 19.4% in the year ended December 31, 2007. And our return on average shareholders equity for the year was 20.4%. Our closing shareholders equity is net of dividend paid and share repurchases of $134 million during the year. We believe these results reflect the diversity of our underwriting platforms, our sound to well executed investment strategy and active management of our capital resources.
Our overall net written and earned premiums generated for our more mature insurance and reinsurance segments are largely in line with our targeted numbers for 2007, which reflected our expectations of softening market conditions. We also anticipated a relatively small contribution in net earned premiums from our newest segment the US excess and surplus lines business. And even though net premiums written were lower than originally estimated the overall net income effects for this segment is a cost of $11 million in 2007.
Our 2007 net income includes approximately $45 million from last reserve leases and adjustments, which coupled with the annual return of 17% on our alternative investment portfolios are the main variances sometime in the year ended December 31, 2007.
Turning to each segment: Our property and casualty reinsurance segment net written premiums for the fourth quarter increased over the same period in 2006 principally due to additional premiums recorded of $6 million on a prior period contract.
Our year-to-date premiums written in our reinsurance business includes a higher mix of short tail business in 2007, compared to 2006, reflecting more attractive opportunities in these markets due to pricing and terms and conditions available.
Losses for the year ended December 31, 2007 declines 42%, principally reflecting lower net premiums earned during the year and approximately $36 million in net positive development on prior period reserves of which $6 million approximately relates to the fourth quarter.
Our 2007 combined ratios for the property and casualty reinsurance segment for the fourth quarter and year are 88.3% and 83.9% respectively, compared to 90.8% and 93.9% respectively for the same periods in 2006. Reflecting net reserves releases and changed in the mix of short tail for long tail business in 2007.
A decline in gross premiums written in our excess liability business within our insurance segment in the quarter principally accounted for the decline in our premiums written, when compared to the same period of 2006. We declined to renew some business in the fourth quarter where prices and conditions did not meet our underwriting criteria.
Year-to-date gross premiums written increased due to additional professional liability opportunities and our first full year of aviation insurance business. Losses for the year ended December 31, 2007 which increased 24% over 2006 are net of approximately $9 million in positive development on prior period reserves principally property related and also include $6 million in aviation losses. There were no material reserves changes in the fourth quarter.
The comparative losses incurred number, for the year ended December 31, 2006 include favorable development of $21 million on our excess liability and property reserves. Our 2007 combined ratio for the property and casualty insurance segment for the quarter and year are 96.7% and 86.2% respectively compared to 88.5% and 70.6% for the same period in 2006.
Our US excess and surplus lines insurance segment contributed grossly in written of $27 million during the fourth quarter and $48 million for the year primarily from property related risks.
As mentioned in our previous earnings call, our desire to protect this segment from large loss events prior to developing the business fully measures to purchase reinsurance protection of $35 million for the year ended December 31, 2007.
Lower than the originally estimated premiums written and earned combined with this level of reinsurance protection purchase has exaggerated our loss ratio on this business. A full period of general and administrative expenses partially offset by a small level of net premiums earned resulted in the loss of this segment.
As Mark indicated earlier on the call, we've taken a conservative position in recording evaluation allowance against our deferred tax asset on this business segment, which arose from the net loss recorded in 2007.
Our life and annuity business has enjoyed a successful fourth quarter and year. As previously mentioned, this business is a spread business and results were very directly with investment performance. And accordingly, we believe 2007 demonstrated the earning potential of this segment.
Fourth quarter benefit charge includes (approval) on our existing contracts of approximately $4 million. This $4 million represents less than one-half of 1% of total benefit reserves and we believe an excellent result of the quality of the underwriting we have in our life segment.
Cash provided by operating activities was 443 million for the year after the settlement of over $380 million in paid losses and continues to reflect the growing business and related balance sheet.
Increased operating cash flows and an improving yield environment in 2007 contributed to the 25% increase in net investment income earned in the year. The increase in interest expense in 2007 is principally attributable to interest on Max USA's $100 million Senior notes issued in April 2007 and our $50 million drawdown on our primary credit facility in April 2007. Both of which were used to capitalize our US-based excess and surplus operations.
Total general and administrative expenses for the Group were $27 million and $107 million for the quarter and year ended December 31, 2007 compared to $28 million and $86 million respectively for the same period in 2006. The increase principally relates to the commencement of our US-based excess and surplus lines operation and additionally incentive compensation cost for the year.
Let me turn to Jim Tees now for further discussion of our investments and other balance sheet items.
Jim Tees – Executive Vice President, Chief Risk Officer
Thanks, Joe. Good morning, everyone. Let me begin with the review of the investment portfolio and performance. We had $5.1 billion in total invested assets on December 31st 2007 of which cash and fixed income maturities were $4 billion representing approximately 79% of our invested assets.
Alternative investments were $1.1 billion representing approximately 21% of our invested assets. Compared to December 31, 2006 invested assets totaled $4.5 billion with cash, plus fixed maturities and alternative investments representing respectively 76 and 23%.
The ratio of invested assets to shareholders equity at December 31, 2007 was 3.2 to 1 a ratio that is among the highest and compared with many of our peers. Maintaining this ratio of invested is desirable, as we believe it enhances our ability to continue to deliver mid teen ROE's to our shareholders and enables us to be more selective in our underwriting business, especially during the current environment of increased competition and rate pressure.
We redeemed $195 million in investment from our alternative portfolio during the year-ended December 31, 2007 and was essentially achieved on our objective or brining our alternative investment portfolio in line with our 20% allocation targets.
We had another good quarter of investment performance. For the year investment performance was significant occurring of net income.
Net investment income was $49 million for the quarter ended December 31, 2007 versus $41 million for the same period in 2006, an increase of 20%. For 2007 net investment income totaled $188 million compared to a $150 million in 2006. These increases were due to the larger investment balances and higher yields on cash and fixed maturities portfolio.
We had $54 million of fair value expose to sub-prime mortgage related securities at December 31, 2007 with $49 million are currently rated AAA and $5 million are currently rated AA, and collectively having a weighted average life of about 3 years. These securities represent approximately 1.3% of cash and fixed maturities portfolio.
To-date, a write-down for impairment of any of these securities has not been necessary based upon consideration of current prepayment rates, subordination levels, default rates, credit ratings and weighted average life. Our current analysis supports our belief that we will not incur any loss and principal from these securities.
Net gains on alternative investment were $50 million for the fourth quarter 2007, representing a return of 4.27% versus a net gain of $67 million for the same period in 2006, or a return of 4.31%.
For 2007 net gains on alternative investments were $187 million, representing almost 17% return versus our 8% return paying assumption and compared to $85 million were returned as almost 7% for 2007.
Over the past 60 months, our alternative investment portfolio has produced a 10.28% compound annual return. Our funded hedge funds only performance during the same 60 month period has produced almost 11% compound annual return. Certain underlying funds in our alternative investment portfolio have traded sub-prime securities both long and short position and the trading activity by these funds was the contributor to investment returns in 2007.
Moving onto reserves, our property and casualty reserves were $2.3 billion at December 31, 2007, principally the same as at December 31, 2006, with approximately 70% of these reserves being an IBNR reserves.
Our Life and Annuity benefits reserves increased to $1.2 billion at December 31, 2007, versus $896 million at December 31, 2006, an increase of $308 million. Life reinsurance premium at $302 million that was written during the year with 238 million coming in the fourth quarter principally accounts for the increase in the reserves year-to-date.
Turning to capital management, Shareholders equity at December 31, 2007 was $1.6 billion or $27.54 per share, versus $1.4 billion or $23.06 per share at December 31, 2006.
Book value per share increased 5.4% during the three months ended December 31, 2007. For 2007, book value per share has increased 19.4% net of dividend. At the same time we returned over $134 million of capital to shareholders during 2007 through share repurchases and dividends.
We repurchased approximately 1.2 million shares outstanding during the three months ended December 31, 2007. For 2007, we have purchased approximately 4.3 billion shares outstanding or more than 7% of shares outstanding as of beginning of 2007, at an average cost of $26.56 per share.
We continue to be active in 2008. Since January 1, we have commenced a $15 million accelerated share repurchase program which we expect to be completed by quarter end. In addition, last five week, we repurchased all the shares issued in connection with an exercise of all outstanding warrants held by a founding shareholder. A total of 1,31,178 shares are repurchased from this shareholder at a repurchase price of $29.7 million.
Today we have a $100 million of repurchase authorization from our board. We have to declared the dividend of $0.09 per share, which is payable on March 11, 2008 to shareholder record as of February 26, 2008.
Thanks. And I will now turn the call back to Marty for comments on 2008 guidance, and then open the line for question.
Marty Becker – Chairman, Chief Executive Officer
Thanks Joe and Jim. As we look ahead at our business segments and opportunities for 2008 and apply our current expectation as to rate and retention, we would expect the following. As respect gross written premium by segment, our Bermuda/Dublin insurance and reinsurance businesses will be fairly flat at 390 million and 350 million respectively. Max especially in its first full year, we would estimate it at a 155 million, and our life business again we have taken a placeholder at a 150 million with the lumpy nature of that business. For total gross written premium of a billion and 45 million.
In our Bermuda/Dublin insurance and reinsurance businesses we expect to continue to develop new business relationships as well growing enhance our existing ones. Unfortunately, the reality for underwriters who like self start to exhibit underwriting discipline in softer market is that, these relationship gains will be largely offset by premium declines and loss business.
We are looking to our new Max Specialty platform still some months away from completing its first full year of operation to provide us with organic growth in our P&D businesses, while reflecting our continued prudence in this soft market. We do however expect Max Specialty’s combined ratio to continue to be adversely impacted in 2008 by our need to grow into our initial expense ratio.
We expect to continue to purchase for our insurance businesses approximately the same level of reinsurance coverage that we had in 2007, we continue to believe the bottom line economics of these purchases are attractive in this environment and support maintaining these levels.
Given these dynamics, our estimates of combined ratios for our insurance business in Bermuda/Dublin would e 87 to 89%, our reinsurance business in Bermuda and Dublin 91 to 93%, Max Specialty 119 to 121% with a loss ratio of 56 to 58% for a total P&C combined ratio of 91 to 93%, and net income for the year would be 390 to 420 per diluted share.
Our projected net income per share is less than 2007 as we are not forecasting a repeat of the exceptional 17% alternative asset performance we had in 2007. For 2008 we are using our traditional target return of 8%.
Other key assumptions in those numbers would include no estimate for reserve release or commutation, and obviously no acquisitions. With more and more catastrophes for the year our combined ratio containing about 4 to 6 points for normal expected catastrophes, and we would expect to continue our capital management program including share repurchases.
We are managing our property catastrophe book on a net basis to a lower level or retained exposure than our published policy of 25% of beginning a viewer activity for any series of events and any calendar year period as measured on our 1 and 250 basis.
Our plan for 2008 has this managing exposure to less than 20%, beginning year equity by taking advantage of increasingly attractive reinsurance products. Most recently, Max purchased our first non-traditional cap protection through the Chicago Mercantile exchange using the Cargo Hurricane index product.
We actually purchased two win contracts, one for the North Atlantic Coast and one for Florida. We will continue to review the variety of product opportunities available today with purchases initiated when we see an appropriate risk award.
Based upon these estimates and assumptions our return on equity in 2008 is once again expected to exceed our targeted return of 15%. As you can see even with a more changeling industry environment we expect another good year for Max. We believe that our diversified and distinctive business model continues to serve us and you well.
Our focus remains on return on equity and growth and book value per share. In addition in 2008 to our traditional business activities we will likely be opportunistically and in selectively exploring some possible additive transitions in both existing and new geographic markets.
This is the time in our industries business cycle when M&A based growth may make economic sense as always Max will maintain its discipline in these efforts to best position us to continue to build shareholder value.
We would now open the call for questions and welcome your comments.
Thank you, Mr. Becker. (Operator Instructions). Your first question comes from the line of Chuck Hamilton of FTN Midwest. Please proceed, sir.
Good morning. Thank you and congratulations on a very good quarter guys. I have got a question, I guess and maybe one for Joe firstly is on the life and annuity loss ratio for the quarter. Joe, I know that you indicated that you had a $4 million true up of losses for past periods. When I take a look at the premiums for the life and annuity group for the quarter and then compare it to the losses booked this quarter end, but the $15.7 million spread between the two and taking out $4 million true up I end up with about $11.7 of existing looses on a run rate basis. This is higher than what we've seen last year in the fourth quarter of 5 million and last quarter and third quarter of 8.5 million. Can you help us understand what's going on behind the life and annuity business?
Sure. I will try that for you. The first thing just to remind you Chuck that, we don't sort of typically include a loss ratio in the life business, we don't think it's meaningful. But the benefit expense is still a good question.
I think that the main variance will be in 2006, we recorded some positive development on our life reserves over the year of approximately $5 million. I believe that was recorded in the fourth quarter. So if you compare that to the current year were we've charged $4 million I believe that will explain most of the differential. The life business we have can be a little bit lumpy from quarter to quarter in terms of benefit payments as well. We estimate certain payments and the payments may come in at higher or lower than those amounts and there will be some variation from quarter to quarter of those payments. And that will be the explanation.
Okay, great. And just a quick follow-up, and in terms of the favorable development in the quarter I heard 9 million favorable development from the reinsurance side and 6 million from the insurance side. How does that compare to the fourth quarter in 2006.
I just clarified that. It was 6 millin in total nothing from our insurance segment and 6 million from our reinsurance segment in the quarter.
So it's just 6 million total?
I don't have to hand the numbers we released on the fourth quarter last year. We have to comeback and look at our notes on those. I don't remember them being significant numbers in the fourth quarter last year.
My recollection Chuck is that last year the major adjustment came in the third quater and the only adjustment in the fourth quarter was the life adjustment. But we'll check on that for you.
Okay, great. And then I will queue for further questions. Thanks guys.
Your next question comes from the line of Susan Spivak of Wachovia. Please proceed.
Good morning guys. I was hoping if you could go into a little bit more detail on the alternative portfolio. When we look at their performance on a monthly basis it's getting worse which just makes me a little bit concerned about what happened in January. Is there any way to give some details on January?
We don't normally give any guidance on the current quarter until the quarter ends. What we have said consistently Susan is that we've been outperforming the hedge fund index and we continue to expect to outperform the hedge fund index. That being said for the past three months the hedge fund index hasn't been very attractive. Even though we did significantly out perform it.
While it doesn't necessarily feel good to be better than break even in November and December was actually a significant out performance in those funds related to the year. The hedge fund index last time I checked for January, I believe was down about 200 basis point we would not expect to be down that far, but we don't have a final number for the month, but we would expect to be down.
Okay. And then just in terms of the strategy having the alternative now at about 20.7%, is that something you think you will just keep even?
I think for the moment, we will just ride with it for a while. The capital opportunities to utilize our capital and the underwriting side are not as clinical, that's a pretty nice balance between fixed income and alternative assets and the track record has been good, so I think we will hold where we are for a wile.
Okay, great. Thank you very much Marty.
Your next question comes from the line of Dan Farrell of Fox Pitt. Please proceed.
Good Morning. Can you just talk a little bit about your view on repurchase of reinsurances we had through next year and sort of how the net versus the gross premiums should trend, should be similar to what was seen in '07?
Our reinsurance purchases for 2008 Dan, while they haven't all been completed, most of them have been completed and they are almost exactly the same proportions of what you saw for 2007, we felt that the economic offerings there were extremely attractive and that made prudent sense, though I think you can use the same relationships in your modeling.
Okay. And then I am sorry, probably missed a little of your comment, but can you talk a little bit more about the tax, the full flow during the quarter, I think was deferred tax adjustment or something to that effect?
As a U.S. tax payer, you obviously get to deduct any losses, because Max Specialty did have some modest losses in it's first year. We had initially started to accrue those in the deferred tax assets. We later learned there was some optionality in terms of how you record that so we chose not to take that benefit at this point in time, until that operation achieves maturity.
Okay. And so that you do as more one time in nature than it shouldn’t largely be something we expect to see quarterly adjustments along those line?
We would not plan to take a deferred tax assets benefit until such point in time as Max Specialty begins producing profitability
And we will make a quarterly assessment under development of the company you know, about the recoverability of any deferred tax assets and we will make the call each quarter.
Okay, great. Thanks guys.
Your next and final question comes from the line of Mark Dwelle of Ferris Baker Watts. Please proceed.
Hi Mark, how are you?
I wasn't sure that was me she was referring to. Two questions related to the E&S business. Your guidance for the full year would imply a fairly big acceleration in premiums relative to the recent run rate. Should we assume that is somewhat back ended after this year, I guess in that same vein any update on the progress on California licensing?
It's really not much when you factor in the full year. The fourth quarter they did 27 million, 28 million. They had virtually no contribution from the New Inland Marine Ocean Cargo Group or from the Max's Managers Group. So, if you do an annualization with some growth then you add on those two groups, it's not too imaginative to get to the 150-155 level and that's what we have planned for the year. As respects to California, we have said all the way along that we had a year seasoning requirement that year is not up till the second quarter of this year and it's our hope and our expectation that we will get the California non-admitted license approved by then. We have recently on an admitted basis entered into front in arrangement for the inter arm period until we have our own admitted paper. So I think we are getting all the tools in place, so that they can have a normalized business model.
Okay, that' helpful. Thank you.
I do have another queue from Mark Serfin of Citadel. Please proceed.
Thanks for taking my call. Marty, when you spoke about your plan for strategic M&A, could you share with us a little bit more about how that would balance with share repurchases and then where would that focus be by line or geography?
It is really, at this point Mark, tough to give you much granularity of what we might do. As you can imagine at our size we're mostly looking at smaller specialized situations that would be attractively added on to our existing book of business either bringing in new niche or new geography or a new specialty expertise. The reality is that at the low multiples that most PNC carriers have in their shares right now, it is going to have to be a really attractive situation to warrant going out there and paying any kind of premium for an acquisition. So we are looking, we are prospecting, but we'll see what happens; I wouldn't get too excited about it yet.
Your next question comes from the line of Chuck Hamilton of FTN Midwest. Please proceed.
Great, thank you. I just got my last question, but I did have a question on the warrants that were recently purchased. I presume maybe this is Joe or Jim that they were included in the diluted share count at the fourth quarter. Is that correct?
That's correct they were.
Okay. So we'll take those out of the diluted average for the first quarter then going forward?
And Chuck we're almost ready to file our 10-K, which will give you a better update of our current outstanding warrants and options and then you can adjust those numbers accordingly.
Okay, great. Thank you very much.
Your next question comes from the line of Jason Busell of Philadelphia Financial. Please proceed.
Good morning. Thanks for taking the call. Just had a question regarding the size of the contract that you bought on the CME and what kind type of cover that is?
Its win cover and there were two covers and one was for 10 million and one was for 3 million.
And the reason that you chose a different and non-traditional cover is there anything specific you can expand on?
Purely economic. We looked at it and it was a very attractive purchase for us relative to the book of business for writing.
Great. Thank you.
Ladies and gentleman, there are no further questions in the queue at this time.
All right, we'll, thank you very much once again for joining us on our call. We are quite pleased with the year we have just had and are optimistic about 2008. If you have individual questions or specific questions you would like more detail on, please feel free to reach out to Jim Tees, Joe or myself and we will be happy to try and help you. Thanks so much.
Thank you for your participation in today's conference ladies and gentleman. This does conclude the presentation. You may now disconnect.
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