How Hurricane Irma Blew in an 8.7% Dividend Yield

Hurricane left plenty of destruction in its wake. It also left an opportunity to capture a big dividend yield if you knew where to scavenge the aftermath.
As Irma approached South Florida, everyone anticipated the worst. Residents boarded and secured their houses, bolted inland, and then prayed for the best.
Investors anticipated the worst by selling the property & casualty insurers with Florida exposure. AIR Worldwide, a catastrophe-risk-modeling company, got investor dander whirling at triple-digit speed after it had forecast that insured claims would hit $65 billion.
Blue Capital Reinsurance Holdings (NYSE: BCRH), a reinsurance company that shares the risk of hurricanes and other catastrophes, was hit by gale-force selling. Its share price dropped 22% as Irma made landfall. The lower share price, in turn, lifted the Blue Capital dividend yield to 10.6%.
As occurs so often in life, reality failed to live up to hype. Irma was expected to hit Florida as a category 5 hurricane. It hit as a category 4. What’s more, it hit off course.
The Keys were swamped, as was the southwest Florida coast. Miami — densely populated, densely developed — was expected to endure the full fury. It didn’t. Miami was spared, relatively speaking. (I say “relatively” because flooding was sparse.)

Damage Less Than Expected

Irma caused significantly less damage than experts initially forecast. AIR Worldwide was as off course as Hurricane Irma was. After Irma had withered to an annoying shower, AIR downgraded (or upgraded?) its forecasts for insured losses to range between $20 billion and $40 billion.
The insurance and reinsurance companies saw their share prices rebound after AIR’s recalculation. Blue Capital saw its shares spike 16%. But the price has yet to return to pre-Irma levels. This is good news. Blue Capital still offers an opportunity to pick up high yield at a discounted price.
The hard sell in Blue Capital shares was a product of guilt by association as much as anything. Blue Capital is a property & casualty reinsurer. And it has exposure in Florida, but not much exposure. Only 6% of its annual premiums are generated in the Sunshine State.
What’s more, Blue Capital is more conservative than most reinsurers. It writes coverage only to the level of cash it has on hand. It holds the premiums in short-term U.S. Treasury securities, which eliminates market risk.
Blue Capital also has deep-pocket backers. It’s a subsidiary of Endurance Specialty Holdings Ltd. (NYSE: ENH), which is a member of the Sompo International (OTC: SMPNY) group of companies.
Blue Capital sent the most important signal that it’s doing better than most investors think. It declared its quarterly dividend.
The Blue Capital dividend was maintained at $0.30 per share. There was some doubt whether Blue Capital would pay the quarterly dividend. The doubt has been removed.

Blue Capital Dividend Still Yields 8.7%

The good news is that the Blue Capital dividend will be paid. The better news is that the recent sell-off in Blue Capital shares in anticipation of onerous claims has created an opportunity.
Blue Capital shares still trade at a 10% discount to their market price before Hurricane Irma. The opportunity to pick up meaningful yield still exists. The dividend — based on trailing-12 months of payments — still yields 8.7%.
Blue Capital appears to have weathered Hurricane Irma better than expected. This is evinced by the company maintaining its quarterly dividend. Had its liabilities been more extensive, the Blue Capital dividend would have likely been suspended, which wouldn’t be unreasonable. Clearing the books of immediate liabilities trumps paying an immediate dividend.
Catastrophes are part and parcel of the business. If they never occurred, Blue Capital would never exist. And if catastrophes never occurred, the opportunity to buy Blue Capital’s well-covered dividend at a discounted price would never exist.

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