Don't look now, but value stocks are back in style -- with inflation and coming increases in interest rates as the culprit. Just to cite one example: The Vanguard Value ETF has outperformed the Vanguard Growth ETF 15.8% to 4.8% in the past year.
Rising interest rates tend to hurt growth stocks more than value stocks. That's because growth stocks rely more on long-term gains and suffer more from the discounting effect of rising interest rates. In contrast, value stocks can do quite well. Not only that, but companies with pricing power will be stronger performers during times of inflation. One value stock with pricing power that has outperformed the broader market is Old Republic International Corp. (ORI 2.77%).
Beating the market for a decade
When it comes to market-beating stocks, insurance companies aren't necessarily the first thing that comes to mind. But that's exactly what Old Republic International has done for a decade now. The stock has outperformed the S&P 500 index, returning investors 386% compared to the S&P 500's 294% at the same time.
Old Republic International writes insurance policies across different risks. It covers a wide range of things like aviation insurance, commercial automotive insurance, general liability, and workers compensation, to name a few. It writes policies for businesses, governments, and other institutions, with little exposure to personal lines of insurance.
Another type of insurance it provides is title insurance. Title insurance is a type of coverage used in property transactions. A title is a document showing legal ownership of a property or asset. Sometimes, claims are filed against a property's title, like back taxes, liens, or other claims. This is where title insurance comes in. This type of insurance protects lenders or buyers from financial losses if there are any unknown issues on the title for a property. As a result, Old Republic International tends to do well when real estate markets are active.
Stellar risk management propels ever-increasing dividends
Insurance companies are in the business of weighing risks and then managing those risks. The best insurance companies do a stellar job of managing risks, and Old Republic International is one of them. One measure of risk management in insurance is the combined ratio. The combined ratio is simply a measure of claims paid out plus operating expenses divided by premiums written. A ratio below 100% means profitability, and the lower, the better.
Old Republic International's combined ratio was 88.5% on its general insurance and 89.9% on its title insurance in 2021 -- both excellent figures. Its general insurance combined ratio has been 95.9% since 2015, while its title insurance combined ratio is a stellar 91.7%.
Capital management is something else to pay attention to with insurance companies. Old Republic International has paid a dividend every year for the past 80 years. Not only that, but the company has increased its dividend payout for the past 40 years.
Payout ratio is a measure of cash dividends paid out, divided by a company's cash flows minus capital expenditures and preferred dividend payouts. This ratio is useful to help you evaluate how likely it is that a company can sustain its current dividend. A ratio over 100% means a company is paying out more in dividends than it receives in cash and can be unsustainable. For Old Republic International, its payout ratio is just 33%, suggesting that the company shouldn't have a problem continuing its dividend payouts.
It has this tailwind working in its favor
One benefit of owning insurance companies is their pricing power, which is one reason Warren Buffett is so fond of investing in them. When inflation rises, insurers face higher claims payouts due to rising costs of goods and services to settle those claims. But insurers can adapt relatively quickly by increasing premiums on new policies. Because of this flexibility, insurers can easily pass on inflationary costs to customers.
One other tailwind for insures is rising interest rates. That is because insurers put excess cash to work in investments. In 2021, Old Republic International made $434 million on net investment income or about 5% of its total operating income.
Old Republic International is a solid value with its price-to-earnings (P/E) ratio of 5.3 and a forward P/E of 9.7, which are on the lower end for the industry. Its long-term performance has been stellar, and it is positioned well to take advantage of higher inflation and rising interest rates, making this a value stock you don't want to ignore.