The Accuracy of Relative Valuation Methods: An Empirical Study of Mainland China’s Insurance Industry

This paper is based on the research results of Nissim (2013), which focus on the relative valuation of U.S. insurance companies. In this study, we hope to provide a specific, effective, and practical method to investors for estimating the intrinsic value of insurance companies in Mainland China. We empirically examines the accuracy of relative valuation methods using data from those companies. Our approaches differ from Nissim’s study in the following terms: the financial fundamentals we used, the adjustments we made to the financial fundamentals, the selection of comparable, and the use of conditioning variables. Our empirical findings include the following. First, over the last decade, earnings multiples have performed better than book value multiples in valuing insurance industry. Second, contrary to the conclusion of many analysts, excluding accumulated other comprehensive income (AOCI) from book value worsens the valuation accuracy. Third, during the financial crisis or the non-financial crisis, using income before special items and realized investment gains and losses, instead of reported income, significantly improves the valuation accuracy. Fourth, because of the logic flaw, conditioning the P/B ratio on ROE will not improves the valuation accuracy of book value multiples. Finally, the valuations based on analysts’ earnings forecasts significantly outperform those based on reported earnings or book value, although this advantage has been overstated.