Owl Creek Asset Management Sends Letter to Old Republic’s Board of Directors

Proposes three clear, constructive pathways to unlock Old Republic’s full potential and drive long-term shareholder value, including initiating a review of strategic alternatives for its title business

Highlights materially undervalued shares and an opportunity to create well over 50% in incremental shareholder value

Expresses significant concerns with Old Republic’s corporate governance practices, Board structure and lack of Board diversity

NEW YORK--(BUSINESS WIRE)--Investment funds advised by Owl Creek Asset Management, L.P. (“Owl Creek”), an event-driven and fundamental value long/short investment advisory firm based in New York, are shareholders of Old Republic International Corporation (“Old Republic” or “the Company”) (NYSE: ORI) and beneficially own over 2% of the Company’s outstanding common equity. Owl Creek today announced that it has delivered the below letter to Old Republic’s Board of Directors (“the Board”) following failed attempts to constructively and privately engage with the Company.

Owl Creek believes that Old Republic’s shares continue to be materially undervalued in the market and, if the firm’s suggestions are implemented, the Company has the opportunity to create more than 50% in incremental shareholder value. Among other topics, the letter proposes three clear, constructive pathways to unlock Old Republic’s full potential and drive long-term shareholder value.

Specifically, Owl Creek urges Old Republic to:

1. initiate a review of strategic alternatives for its title business, including a potential spin-off, sale, or Reverse Morris Trust transaction;
2. conduct a thorough review of its classified Board structure and current Board composition, as well as adopt best-in-class corporate governance practices; and
3. authorize a disciplined and valuation-based share repurchase program.

Owl Creek strongly believes that these three initiatives will drive significant long-term value creation.

The full text of the letter can be found below.

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Old Republic International Corporation
307 North Michigan Avenue
Chicago, IL 60601
April 6, 2021

Dear Board of Directors,

As you are aware, investment funds advised by Owl Creek Asset Management, L.P. (“Owl Creek” or “we”) are shareholders of Old Republic International Corporation (“Old Republic” or the “Company”) and beneficially own over 2% of the Company’s outstanding common equity. We have shared with you in the past our view that Old Republic’s shares are significantly undervalued and, over the last few quarters, have engaged privately in what we hoped would be constructive dialogue regarding pathways to unlock significantly more value for all of Old Republic’s stakeholders.

Despite our efforts, however, Old Republic has continued to display a disappointing unwillingness to explore new and independent proposals brought forth by Owl Creek, a shareholder invested in the long-term success of the business. We believe the Company’s continued refusal to address legitimate shareholder concerns with its organizational framework, entrenched Board structure and severe lack of Board diversity, among other topics, to be unacceptable and indicative of its historically weak and, frankly, evasive shareholder communications practices. Most recently, despite ongoing and repeated requests from a number of shareholders, Old Republic has once again failed to address any material concerns in its latest proxy filing aside from announcing the retirement of one Director well over the Company's retirement age threshold. We understand that other shareholders have similar concerns and have brought up a number of these points before on public conference calls only to be completely disregarded by management. As such, we believe this is a good time to publicly share our views with other shareholders, and we hope this letter serves to encourage productive discussions.

While the Company is poised to benefit from an improving industry backdrop across both of its business segments, we believe significant barriers still exist to Old Republic unlocking its full potential, and that Old Republic’s shares remain materially undervalued in the market. For example, a standalone valuation of just the general insurance segment would be in excess of the entire consolidated market capitalization, implying negative value for the #3 title insurer in the nation, the run-off business and any other capital.

Further, we believe that if our suggestions are implemented and Old Republic unlocks the value of its overshadowed title business, the Board has the opportunity to create more than 50% in incremental shareholder value. Specifically, we believe that the Board could potentially realize additional shareholder value by:

1. Initiating a review of strategic alternatives for the title business, including a potential spin-off, sale, or Reverse Morris Trust transaction;
2. Conducting a thorough review of the composition of the Board of Directors and adopting best-in-class corporate governance practices; and
3. Authorizing a disciplined and valuation-based share repurchase program.

    

1. Rationale for a Review of Strategic Alternatives for the Title Business
Old Republic is Significantly Undervalued on a Sum-of-the-Parts Basis	Old Republic’s shares appear to be materially undervalued on both a “consolidated” and “sum-of-the-parts” basis. Shares are valued at a discount to nearly all publicly traded commercial lines insurers in the U.S. on most relevant consolidated valuation metrics despite negligible business interruption exposure and attractive lines Old Republic trades near half the multiple of comparable commercial lines peers^1 trading at ~2x tangible book value On a “sum-of-the-parts” basis, we believe shares are even more undervalued as the market does not appear to give any credit for Old Republic’s title business We also believe the market has never ascribed real positive value to the title business, even at peak share prices We believe the Company’s general insurance business alone is worth more than the value attributed to the entire Company, implying that the market is ascribing negative value to the 3rd largest title business in the country
General Insurance and Title are Different Business Models	Old Republic’s title and general insurance segments operate fundamentally different business models that have distinct strengths but share no clear benefit from being operated under the same corporate umbrella. General insurance is a traditional balance-sheet-intensive insurance operation, while title is better described as a “fee-based” business that is driven by real estate market fundamentals and maintains stable pricing within a disciplined industry structure We also believe the current combination deters many natural shareholders given the limited overlap between segments, increased underwriting complexity and different risk / reward profiles of the businesses Despite the Company’s consistent messaging on the benefits of this strategic diversification, we believe shareholders are unduly punished, not rewarded, for this combination
Spin-off Would Improve Management Focus and Incentives	We believe that separating the title business would sharpen the focus of management, allow for increased investment, and improve management team incentives. At the same time, Old Republic’s general insurance management could be more directly incentivized for, and focused on, the performance of the general insurance business. We believe the title insurance industry is undergoing a technological revolution that aims to make the process much more efficient and convenient at each underwriting step While Old Republic is currently competitive and executing well, we are concerned it could fall behind without increased investment going forward
Spin-off has Minimal Incremental Costs and Business Disruption	Our conversations with both management and prior employees have highlighted the lack of integration between both businesses. We believe that a separation of the title business would come with minimal incremental costs given the preexisting decentralized operating structure
2. Rationale for Board and Corporate Governance Refreshment
Corporate Governance Reform Must be Accelerated	Old Republic’s Board and past management, in our view, have a concerning track record of poor communications with shareholders and a general unwillingness to cooperate with shareholders. Proxy advisory firms have emphasized the Company’s history of ignoring the clear will of a majority of shareholders and failing to remove Directors who received majority opposition They have even raised concerns regarding the governance and nominating committee’s duty to shareholders, which further emphasizes that change must come from within the Board As evident in recent elections, no Director has received close to 80% of the vote in uncontested elections and there is consistent shareholder opposition of nominated Directors A majority of shareholder votes were withheld for the Lead Independent Director last year, for three additional Directors the year prior, and for other Directors extending back to 2016 – illustrating clear investor frustration that continues to go unaddressed We believe this reputation is unacceptable and a clear impediment to shareholder value creation Given more than five years have passed since similar requests were made publicly, we believe the acceleration of corporate governance reform is needed to bolster institutional investor support and invite fresh perspectives to a stagnant Board
Board Structure and Corporate Governance Practices are Harmfully Outdated	Old Republic’s Board structure and corporate governance practices are severely outdated – at the expense of shareholders and long-term value creation. As it currently stands, Old Republic’s Board is not declassified, does not have an Independent Chairman, has a clear lack of diversity, and does not enforce its existing Director retirement policy, among other concerns Old Republic’s current Board has no diverse representation and includes just one female Director – a trend the Company has displayed for nearly 100 years since its founding in 1923 Additionally, half of the Board is over the 75-year retirement threshold stated in the Company’s Board governance documents and the Lead Independent Director has served for 47 years, bringing to question the independent perspectives brought to Board discussions Only exacerbating these troubling facts is the Company’s unwillingness to declassify its entrenched Board, which makes it nearly impossible for the Company to introduce new Directors and for shareholders to constructively engage at the Board level We believe that the Company’s current Board structure and corporate governance practices are a clear impediment to shareholder value creation and: Discourage the involvement of both existing and new investors Lack accountability, particularly with enforcing its existing Director retirement policy and allowing for productive Board churn Ultimately withhold sound leadership from a truly independent Lead Independent Director and Chairman who could bring fresh perspectives
Corporate Governance Reform is Needed to Protect and Bolster Investor Support	We believe Old Republic must conduct a thorough review of its current corporate governance practices and adopt best practices, and we encourage the Company to address these items by: Declassifying its Board; Electing a truly Independent Chairman; Removing Director plurality voting provisions and introducing (and upholding) an appropriate Director resignation policy; Improving a clear lack of Board diversity; Enforcing the Company’s existing Director’s retirement policy, given that half of its Board has passed the 75-year threshold; and Disclosing objective performance criteria for executive bonuses and incentives. Additionally, we believe continued advances in investor relations initiatives are needed to protect and grow Old Republic’s active institutional investor base, given rapidly increasing shareholder demands for corporate transparency.
3. Rationale for a Disciplined and Valuation-Based Share Repurchase Program
Opportunity to Capitalize on Current Share Price and Debt Levels	To act in the benefit of long-term shareholders, we believe the Board should immediately authorize a sizeable share repurchase program – not at any price, but through a disciplined and valuation-based approach. Shares currently still trade at an enormous discount to our estimate of intrinsic value, making such a program particularly relevant and accretive to current investors If the Board had a disciplined approach to share repurchases, the capital allocated towards a special dividend last year could have repurchased over 5% of the market capitalization at extremely accretive levels
Inefficient Allocation of Capital	In the current low-rate environment, and with a commitment to substantial and increasing dividends, reinvesting any excess capital into an investment portfolio may not be an efficient allocation of capital. Old Republic’s consolidated debt/capitalization levels have become extreme when compared to both historical levels and those of peers. We believe incremental debt in today’s interest rate environment should not be ignored as a source of capital to repurchase shares paying a sizeable dividend yield For example, Old Republic earned an effective ~3% yield on fair value of assets last year and that capital would have been more effective if utilized to repurchase shares yielding over 5% for a meaningful portion of 2020 We struggle to understand how the Company, which prides itself in its safe and sizeable equity portfolio, does not see the value in repurchasing its own conservatively capitalized and dividend-paying shares at an enormous discount to intrinsic value Repurchasing shares at accretive levels also helps reduce the growing total dividend payout while freeing up future capital generation for investment in the business or increasing the pro forma dividend yield

^1 Commercial lines TBV multiple in line with peers without meaningful business interruption insurance overhang or idiosyncratic concerns. Selected peer set includes Chubb (CB), Markel (MKL), Travelers (TRV) and W.R. Berkeley (WRB)

Additionally, we believe it is important to highlight what we believe is the misleading nature of Old Republic’s total shareholder return over several decades. Although the Company has generated strong returns over the long-term, we believe much of that compounding has been forcibly forfeited by investors due to the unnecessary tax leakage on Old Republic’s dividend-heavy returns, compared with peers whose returns are driven by tax-deferred share price appreciation. On a tax-adjusted basis, total shareholder returns paint a very different story versus peers, and we believe these taxes are an unnecessary form of leakage for long-term shareholders. We believe that a share repurchase program, as outlined above, would help reduce this unnecessary tax leakage on Old Republic’s returns, helping to improve long-term value creation for shareholders and ultimately creating a more investor friendly and attractive company.

To summarize, we believe that Old Republic has tremendous value and, in order to reach its full potential for the benefit of long-term shareholders, the Company should initiate a strategic review of its title business, immediately adopt best-in-class corporate governance practices and authorize a valuation-based share repurchase program.

We hope that this letter helps you and other shareholders better understand our thought process. While we are strong believers in Old Republic’s long-term story, we believe there is more to do to unlock untapped potential.

Regards,

Jeffrey Altman
Managing Partner
Owl Creek Asset Management, L.P.

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About Owl Creek

Owl Creek Asset Management, L.P. is an investment advisory firm based in New York. It primarily employs an event-driven and fundamental value long/short investment strategy in equity and debt markets across the globe. The firm was founded in 2001 and is registered as an investment adviser with the U.S. Securities and Exchange Commission.