Blame It on the Weather

Don't look now but property and casualty insurance companies are being featured in their very own game of whack-a-mole whether they realize it or not -- and this time the weather-related excuse does hold water.

Since the beginning of the year we have dealt with the worst tornado outbreak in a half decade, a widespread flood down the Mississippi, and the destructor known as Hurricane Irene. These weather events don't even take into account the liabilities P&C insurers faced due to large natural disasters like the tragic earthquake and subsequent tsunami in Japan in March. Adding up all of these tragic events in just a few short months has ravaged insurers' balance sheets and stock prices.

While I don't enjoy finding opportunity in these tragic events, P&C insurance stocks now seem cheaper than ever. Just take a look at a few of these valuations:

Source: Morningstar.

Allstate has been creamed by weather-related catastrophes within the past year. The company recorded $2.3 billion in catastrophe-related expenses in the second quarter, more than twice that of rival Travelers (NYSE: TRV), yet bright spots remain. The company's combined ratio, which measures how profitable it is for an insurer to underwrite policies, actually improved to 87.5 from 88.1 in the year-ago period. These are strong numbers, as anything below 100 implies underwriting profitability. Trading at 71% of book value and below seven times forward earnings, Allstate may be a name you can trust.

Cincinnati Financial and Tower Group are two names I've featured as dividend champions of the insurance sector. Cincinnati Financial hasn't lowered its quarterly distribution since 1960 and has apportioned more than a quarter of its $12 billion investment portfolio into dividend-paying equities that allow it to maintain such a lofty payout. Tower Group, one of my picks as a small cap to rule them all, has outperformance written all over its results. Its five-year annual dividend growth rate of 49.7% crushes nearly all of its peers.

If the name White Mountains sounds familiar, that may be because it's a Rising Star buy of fellow Fool Jason Moser. I'm a big fan of book value when determining whether a financial company is undervalued, which may I add is not always as cut-and-dried as it appears. White Mountains, despite a rough year in 2010, has grown its book value at a compounded rate of 10.5% since 1993. With two-thirds of its investment portfolio in fixed-income assets, it's one of the safer bets in the P&C sector.

American International Group might be an odd name to add to this list considering how murky its balance sheet could be following the credit crisis of 2008. But, with the company now handsomely profitable and trading for roughly half of its book value, the potential rewards appear to be outweighing the risks. Currently suing Bank of America (NYSE: BAC) for $10 billion, the company is looking to shore up a debt-burdened balance sheet. With the mortgage mess largely behind it and revenue stabilizing, the company can get back to growing at 10% per year.

The property and casualty sector could provide the safety net your portfolio needs to ride out these volatile markets. While these aren't ringing endorsements for any of these companies, it does provide the basis for further research into this sector. You can get started by adding Allstate, Cincinnati Financial, Tower Group, White Mountains Insurance, and American International Group to your watchlist.

What's your favorite stock in the insurance sector? Share it with the community in the comments section below!