Zavarovalnica Triglav

Executive Summary

Investment Thesis (3 Sentences)

Zavarovalnica Triglav is the dominant insurer in Slovenia (40.8% market share) and the Adria region (20.6%), operating as a quasi-regulated oligopoly with 124+ years of operating history. Following a CAT-event-impacted 2023, the company has demonstrated strong recovery with ROE returning to 14%, combined ratio improving to 91%, and a 60% dividend increase. The stock trades at 10.5x earnings with a 4.8% yield, offering reasonable value for a quality regional insurer, though government control (62.56%) and illiquidity present governance and exit risks.

Key Metrics Dashboard

Decision & Sizing

Primary Catalyst & Timeline

• Catalyst: Continued dividend growth as 2025 guidance suggests maintaining upper-end profitability
• Timeline: Ex-dividend June 16, 2025 (€2.80/share proposed)

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PHASE 0: Opportunity Identification (Klarman)

Why Does This Opportunity Exist?

Assessment: The opportunity existed primarily due to (1) illiquidity/neglect from the Ljubljana Stock Exchange being off the beaten path, and (2) temporary CAT event impact in 2023. The market has now largely recognized the recovery (stock +46% YTD), reducing the opportunity.

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PHASE 1: Risk Analysis (Inversion Thinking)

"All I want to know is where I'm going to die, so I'll never go there." - Munger

Top 3 Ways This Investment Could Fail

1. Government Control Risk (Probability: 20% | Impact: -30%)

• Risk: State holds 62.56% through ZPIZ (34.47%) and SDH (28.09%)
• Mechanism: Political interference in underwriting, dividend policy, or strategic decisions
• Historical Evidence: No major interference to date, but political changes could alter dynamics
• Mitigation: Long history of professional management; government has financial incentive in dividends
• Expected Loss: 20% × 30% = 6%

2. Catastrophe Event Recurrence (Probability: 25% | Impact: -40%)

• Risk: Slovenia/Balkans exposed to floods, storms (as seen in 2023)
• Mechanism: Large claims → combined ratio >100% → earnings destruction → dividend cut
• Historical Evidence: 2023 combined ratio hit 101.6%, ROE collapsed to 1.8%
• Mitigation: Reinsurance program, ~225% solvency ratio provides buffer
• Expected Loss: 25% × 40% = 10%

3. Liquidity/Exit Risk (Probability: 15% | Impact: -25%)

• Risk: Ljubljana Stock Exchange is illiquid; large sales could move price significantly
• Mechanism: Need to sell → price impact → realized loss below NAV
• Current Position: 7.19% of portfolio = manageable but not trivial
• Mitigation: Long holding period assumed; patient exit over time
• Expected Loss: 15% × 25% = 3.75%

Bear Case Summary (Short Thesis)

"Triglav is a government-controlled insurer in an illiquid market, exposed to Balkans geopolitical risk and climate catastrophes. With 62% state ownership, minority shareholders have limited influence. The 2024 recovery is the aberration; normalized ROE is closer to 8-10%, not 14%. At 1.5x book, you're paying full price for a mediocre insurer with governance discount deserved."

Inversion Questions

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PHASE 2: Financial Analysis

Return Metrics

ROE Analysis (5-Year)

Normalized ROE: ~10-11% (excluding CAT events and best years)

DuPont Decomposition (2024E):

• Net Profit Margin: ~7.6% (€131M / €1,720M)
• Asset Turnover: 0.42x (€1,720M / €4,099M assets)
• Equity Multiplier: 4.6x (€4,099M / €891M equity)
• ROE = 7.6% × 0.42 × 4.6 = 14.7% ✓ Confirms reported 14%

Owner Earnings Calculation (2024E)

Net Earnings:                    €131.4M
+ Depreciation/Amortization:     ~€15M (estimated)
- Maintenance CapEx:             ~€10M (estimated)
= Owner Earnings:                ~€136M

Owner Earnings per Share = €136M / 22.71M = €5.99

Valuation Trinity

1. Liquidation Value (Floor)

For an insurer, liquidation value is complex due to policy liabilities.

Tangible Book Value = Total Equity - Goodwill/Intangibles
                    = €891M - ~€50M = ~€841M
Tangible Book Value per Share = €841M / 22.71M = €37.03

Current Price €58.60 vs TBV €37.03 = 1.58x P/TBV

Assessment: Trading at premium to tangible book - not a net-net opportunity.

2. Going Concern Value (DCF Conservative)

Assumptions:

• Owner Earnings Year 0: €136M
• Growth Years 1-5: 3% (inflation + modest growth)
• Growth Years 6-10: 2% (mature market)
• Terminal Growth: 1.5%
• Discount Rate: 10% (EUR equity + small country risk)

DCF Value (10-year):
Year 1-5: €136M growing at 3% = €140, €144, €149, €153, €158
Year 6-10: Growing at 2% = €161, €164, €167, €171, €174
Terminal Value = €174 × 1.015 / (0.10 - 0.015) = €2,077M
PV of Cash Flows + Terminal = ~€1,100M + €801M = €1,901M

Intrinsic Value = €1,901M / 22.71M = €83.70 per share

Margin of Safety: (€83.70 - €58.60) / €83.70 = 30%

3. Private Market Value (What Would a Buyer Pay?)

European insurance M&A typically occurs at:

• 1.0-1.5x book for average insurers
• 1.5-2.0x book for market leaders with clean balance sheets

Triglav has:

• Regional dominance (40.8% Slovenia)
• Clean balance sheet (225% solvency)
• A-rated by S&P and AM Best

Private Market Multiple: 1.6-1.8x book value reasonable

PMV = €39.24 BVPS × 1.7 = €66.71 per share

Current Price vs PMV: €58.60 / €66.71 = 12% discount

4. Relative Valuation

Assessment: Trading in line with peers on P/E, slight premium on P/B justified by superior combined ratio.

Valuation Summary

Intrinsic Value Estimate: €68-72 per share (weighted average of methods) Current Margin of Safety: ~15-18% (moderate)

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PHASE 3: Moat Analysis

Moat Sources

Moat Durability Assessment

10-Year Moat Trajectory: Stable (neither widening nor narrowing materially)

Moat Rating: MODERATE

Dominant regional position is real but:

• Not a "Coca-Cola" level brand moat
• Insurance is inherently competitive on price
• Geographic concentration = undiversified

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PHASE 4: Management & Incentive Analysis

Executive Team

Tenure Assessment: Exceptionally stable leadership team with deep institutional knowledge.

Capital Allocation Track Record

Dividend Policy: Balanced between shareholder returns and growth - appropriate for mature market leader.

Insider Activity

Limited visibility on Ljubljana Stock Exchange - no Form 4 equivalent readily available.

Government Ownership Considerations

Risks:

• Political appointment of supervisory board members
• Pressure to maintain employment regardless of efficiency
• Strategic decisions may favor national interest over shareholders

Mitigants:

• Professional management team with long tenure
• Listed company with minority shareholders = some discipline
• Government benefits from dividends (pension fund is largest holder)
• No evidence of value-destructive interference historically

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PHASE 5: Catalyst Analysis

Potential Catalysts

No Catalyst Assessment

Currently no strong near-term catalyst beyond dividend. The story is already largely reflected in price (+46% YTD).

Implication: Larger margin of safety required or accept that this is a dividend-income holding, not a deep-value opportunity.

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PHASE 6: Decision Synthesis

Graham's 7 Criteria Assessment

Graham Quality: 5/7 passed - acceptable but not "defensive grade"

Buffett Quality Criteria

Buffett Quality: 2.5/5 - Mediocre

Megatrend Resilience Score

Total Score: +1 | Tier: T3 (Adaptable)

Expected Return with Probability Tree

5-Year Expected Return: +31% (~5.5% annualized + 5% dividend = ~10.5% total return)

Position Sizing

Current position: 7.19% of portfolio

Assessment: Position size is appropriate given:

• Moderate moat (not T1)
• Illiquidity risk
• Government control discount warranted
• Already up +25% - not adding at current levels

Recommendation: HOLD at current size

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Price Targets & Recommendation

┌─────────────────────────────────────────────────────────────────┐
│                     INVESTMENT RECOMMENDATION                    │
├─────────────────────────────────────────────────────────────────┤
│ Company: Zavarovalnica Triglav       Ticker: ZVTG               │
│ Current Price: €58.60     Date: December 24, 2024               │
├─────────────────────────────────────────────────────────────────┤
│ VALUATION SUMMARY                                                │
│ ┌─────────────────────────┬─────────────┬─────────────────────┐ │
│ │ Method                  │ Value/Share │ vs Current Price    │ │
│ ├─────────────────────────┼─────────────┼─────────────────────┤ │
│ │ Tangible Book Value     │ €37.03      │ +58% premium        │ │
│ │ DCF (Conservative)      │ €83.70      │ 30% MOS             │ │
│ │ Private Market Value    │ €66.71      │ 12% MOS             │ │
│ │ Owner Earnings (10x)    │ €59.90      │ 2% MOS              │ │
│ │ Owner Earnings (12x)    │ €71.88      │ 18% MOS             │ │
│ └─────────────────────────┴─────────────┴─────────────────────┘ │
│                                                                  │
│ INTRINSIC VALUE ESTIMATE: €70 (rounded weighted average)        │
│ CURRENT MARGIN OF SAFETY: 16%                                   │
├─────────────────────────────────────────────────────────────────┤
│ RECOMMENDATION:  [ ] BUY  [x] HOLD  [ ] SELL  [ ] WAIT          │
├─────────────────────────────────────────────────────────────────┤
│ BUY PRICE (Strong):         €49.00 (30% below IV)               │
│ ACCUMULATE PRICE:           €56.00 (20% below IV)               │
│ FAIR VALUE:                 €70.00 (Intrinsic Value)            │
│ TAKE PROFITS PRICE:         €84.00 (20% above IV)               │
│ SELL PRICE:                 €105.00 (50% above IV)              │
├─────────────────────────────────────────────────────────────────┤
│ POSITION SIZE: 7.19% (current) - maintain, no change            │
│ CATALYST: Dividend payment June 2025; continued earnings growth │
│ PRIMARY RISK: CAT events + government control                   │
│ SELL TRIGGER: Combined ratio >100% for 2 years; government      │
│               signals restructuring; dividend cut >30%          │
└─────────────────────────────────────────────────────────────────┘

Explicit Sell Triggers

1. Thesis Break: Government announces material change to ownership structure or dividend policy
2. Moat Erosion: Market share falls below 35% in Slovenia
3. Management Failure: CEO replaced by political appointee with no insurance experience
4. Valuation: Price exceeds €105 (50% above fair value)
5. Financial: Combined ratio >100% for 2 consecutive years

What I Will NOT Sell On

• Single CAT event (reinsurance covers)
• Short-term price drops without fundamental change
• Market volatility in Ljubljana Stock Exchange
• Macro concerns about Eurozone (Slovenia is well-integrated)

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Monitoring Metrics

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Psychology Check

Munger's Final Test

1. Circle of Competence: Can explain - regional insurer with dominant market share
2. Variant Perception: Market correctly values this as moderate-quality insurer; no edge
3. Humility Check: If CAT events become more frequent due to climate change, thesis is damaged
4. Inversion Final: If -50% tomorrow, would add cautiously but not aggressive (moderate conviction)

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Sources Used & Data Extracted

Web Sources Consulted

Data Limitations

• Ljubljana Stock Exchange: Not covered by AlphaVantage or EODHD APIs
• SEC Filings: Not available (Slovenian company)
• Detailed Annual Reports: Would require manual PDF download from Triglav IR
• Insider Transactions: Not readily available for LJSE

Data Validation

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Conclusion

Zavarovalnica Triglav is a moderate-quality regional insurer with dominant market position but several structural constraints (government control, illiquidity, CAT exposure). The current price of €58.60 represents fair value with a modest 16% margin of safety - not compelling for new purchases but appropriate to hold for income and modest appreciation.

Final Verdict: HOLD at current allocation. Collect dividends (4.8% yield). Would consider adding only below €50.

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Analysis completed December 24, 2024