With property-casualty companies increasing their book value per share, the outlook for property-casualty insurance stocks is now viewed as “compelling” as opposed to “attractive,” according to a Bank of America analysis.

The analysis said that many p-c stocks are trading at or below book value. “We firmly believe that valuation is the most important criteria when investing in insurance, even though we realize that valuation has not mattered lately, as the stocks continue to fall.”

According to the bank, valuation will eventually matter again. “When the stock market is essentially giving buyers the opportunity to receive $1 for every 80 cents invested, based on our estimates, at some point attractive valuation will be its own catalyst, which is why we are even more positive on the sector than at the beginning of the year.”

Bank of America said it has viewed p-c insurance stocks as attractive throughout 2008 so far. “We kept an overweight rating on p-c stocks because we viewed the sector as providing an attractive risk/reward opportunity,” said the analysis. “We also believed we had a well-reasoned thesis.”

The analysis said the reasons for this view include high-quality investment portfolios in comparison to other financial stocks; return on equity for insurers that is independent of the economy; and an expectation that return on equity would decrease from 2007 but still lead to a growth in book value of 10 percent over 2008.

Additionally, the report said that with valuations below historical averages, “we expected the stocks to appreciate and reward shareholders.”

So far this year, the analysis said, “While fundamentals and book value growth generally materialized as we expected, the stocks did decline rather significantly…outperforming other financials stocks but underperforming the market.”

June stock performance was particularly bad, the analysis said. P-C stocks outperformed banks and financials, but underperformed the S&P 500 by 12 percent, with virtually every p-c stock declining for the month.

XL Capital, AIG and CNA ranked as “the worst performers year to date,” the analysis said.

But it added that stock performance may change through the second half of the year. It stated that “since the value of any stock is the free cash flow it can generate to shareholders discounted at a certain rate, valuation will eventually matter again.”

The analysis added, “As the tangible equity of the companies has increased and the stock prices have decreased, the valuations have changed from attractive to compelling, in our view.”

The bank said that higher than expected price decreases, deterioration in terms and conditions, and spikes in loss cost inflation or severe catastrophe losses are potential hurdles to strong p-c stock performance.

But it stated, “With strong capital positions, conservative investment portfolios and balance sheets, we believe selected p-c stocks seem like an excellent port in a storm. The valuations are attractive as they have come under pressure from overall economic concerns and credit worries. The stock valuations are below their historical averages, yet the expected ROEs are above the historical averages.”

The analysis pointed to Travelers and Aspen Insurance as its top picks, while also mentioning The Hartford, Chubb Corporation, RenaissanceRe, AXIS Capital, The Hanover Group Max Capital, Horace Mann and XL Capital as potential strong performers.