Dividend Detective Finds High Opportunity in Insurance

08/17/2017 2:54 am EST


Harry Domash

Publisher, DividendDetective and Winning Investing

Harry Domash is a leading expert in income investing. In his Dividend Detective newsletter, he highlights two recent insurance sector buys at opposite ends of the risk spectrum—a speculative, high yield play and an investment-rated preferred stock.

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We’re adding a new pick to our Dividend Speculators portfolio that perfectly fits the “speculators” definition. It’s a down and out insurance company that has been accused of all sorts of accounting shenanigans.

Founded in 1998, AmTrust Financial Services (AFSI), a property/casualty insurance company, specializes in workers’ compensation, property and casualty insurance for small businesses.

In addition to North America, the company operates in the U.K. and in Europe. AmTrust has been a fast grower. However, in March 2017, AFSI had to restate several quarterly and annual reports to correct misstatements.

Also in April, The Wall Street Journal said that the SEC was investigating AFSI’s accounting practices, mainly about not setting aside enough cash to cover potential losses (loss reserves).

Its share price dropped more than 50% on that news. AmTrust has taken several steps to improve its accounting practices and to shore up its balance sheet.

We think that the worst is over. AmTrust’s share price has moved up recently, but is still trading around 40% off its February high. AmTrust is paying a 4.3% dividend yield.

We’re also adding a new pick to our Preferred Stocks portfolio. It’s an investment-rated preferred paying a 5.5% yield, which is high for investment-rated preferreds.

We’re adding Validus Holdings 5.80% Non-Cumulative, Series B (VR-B) to the portfolio, Based in Bermuda, Validus offers property reinsurance services to other insurance companies.

These investment grade (BBB-) preferreds were issued 6/12/17 and pay “qualified” dividends, meaning that they’re subject to the 15%/20% maximum income tax rates.

The market yield is 5.5% and the yield to their 6/21/22 call date is 5.6%, which is high for investment quality preferreds.

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