The ramifications of the credit crisis in the insurance industry are still being determined as regulators throughout the globe are scrambling to settle on the appropriate capital levels and financial cushions these firms must satisfy to stave off a future calamity. But despite the worries, conditions are quickly returning to normal, with clients starting to spend again on obtaining insurance coverage. Investment portfolios are also benefitting as liquidity returns to equity and fixed income markets.

Despite the improving business fundamentals, insurance industry valuations are lagging recovery prospects and are stuck at multi-year lows. A primary industry measure is the price to book ratio, with many industry leaders sporting stock prices that are trading below book value, or total shareholders’ equity on firm’s balance sheets. Better yet, many of these same firms are trading at single digit earnings multiples.

One such firm is The Travelers Companies (NYSE: TRV). Travelers morphed into its current form in 2004 when Citigroup (NYSE: C) jettisoned Travelers Property Insurance, officially throwing in the towel on the financial supermarket ambitions of the headstrong and former company helmsman Sandy Weill. Travelers joined forces with Saint Paul during 2004, but its famous red umbrella logo didn’t follow until the new Travelers was able to reacquire the ubiquitous trademark from Citi a few years later.

Travelers is currently the third largest property and casualty (P&C) insurer in the country and is an esteemed member of the Dow Jones Industrial Average. Its business segments serve both businesses and individuals, insuring property, automobiles, general liability and workers’ compensation. It closed out 2009 with $110 billion in total assets and book value in excess of $27 billion, or $48.21 per diluted share.

Book value at Travelers has been somewhat steady given the vast majority of its assets are held in fixed income securities, including U.S. Treasuries and municipal bonds. A benign environment for catastrophes like hurricanes and earthquakes has also reduced claims and subsequent hits to earnings and its capital base. Earthquake activity has picked up a bit lately, but Travelers should still be able to post close to $6 in earnings per share this year.

Another event that should positively impact Travelers and the industry overall is when the government ends its involvement with AIG (NYSE: AIG). AIG has benefited from billions of dollars in federal subsidies, artificially low interest rates and similar perks that give it a competitive edge in selling insurance.

The P&C business frequently suffers from booms and busts as excess capital can push insurance premiums down. Travelers states that it focuses on profitability over volume and market share growth, but as one of the largest insurers it must remain competitive during times of surplus capital in the industry.

Shares of Travelers currently trade at a forward P/E under 9.0 and very close to book value. This is a great entry point for one of the steadiest performers in the industry. Earnings are expanding only at a mid single digit rate, but could see a boost once AIG has to compete on more even footing.

Shareholder returns have also been strong. The stock sports a 2.5% dividend yield and management repurchased $3.3 billion in common stock last year. Returns on equity (ROE) have also been strong; ROE was a stellar 18.5% during the most recent quarter and came in at 13.5% for all of 2009. Management targets a mid-teens return on equity over the long haul. Travelers estimated that total returns to shareholders exceeded +50% last year, which includes stock appreciation and the reinvestment of dividends.

Book value growth has been more impressive and should remain so — it has expanded at +10% annually during the past five years. The book value multiple should expand as well. The stock price reached 127% of book value prior to the credit crisis, implying an upside of at least 25% from current levels with growth in profits and book value something that investors can bank on for the foreseeable future.