This study examines the accuracy of relative valuation methods in the U.S. insurance industry, using price as a proxy for intrinsic value. The approaches differ in terms of the fundamentals used, the adjustments made to the fundamentals, the use of conditioning variables, and the selection of comparables. Selected findings include the following. First, over the last decade, book value multiples have performed significantly better than earnings multiples in valuing insurance companies. Second, inconsistent with the practice of many analysts, excluding accumulated other comprehensive income from book value worsens rather than improves valuation accuracy. Third, as expected, using income before special items, instead of reported income, improves valuation accuracy, but, surprisingly, excluding realized investment gains and losses does not. An exception to this latter result occurred during the financial crisis, likely due to an increase in "gains trading." Fourth, conditioning the price-to-book ratio on return on equity significantly improves the valuation accuracy of book value multiples. Finally, while valuations based on analysts' earnings forecasts outperform those based on reported earnings or book value, the gap between the valuation performance of forecasted EPS and the conditional price-to-book approach was relatively small during the last decade.
Nissim, Doron. "Relative Valuation of U.S. Insurance Companies." Review of Accounting Studies 18, no. 2 (2013): 324-359.
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