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Travelers (NYSE:TRV), the sole insurance company among the thirty Dow Industrials, only joined the Blue Chips in mid-2009.

By then, some of the financial sector’s most prominent hotshots had crashed into a fiscal brick wall, you may recall: The ever-fabulous Citigroup (NYSE:C) and “What, Me Worry?” American International Group (NYSE:AIG) were both pulled from the Dow after disastrously outsmarting themselves.

Travelers remained stable, and that’s one reason it was added to the DJIA when the more rambunctious financials got yanked. Unfortunately, Travelers’ industry is barely treading water these days, and the same earthbound investing strategy that helped the big property/casualty insurer ride out the financial storm just about guarantees a drab operating performance.

Back when not screwing up was a major achievement, in other words, Travelers stood tall. But now, Wall Street wants a bit more. As a result, even though the company has spent billions of dollars buying back shares over the past year, and despite its relatively generous 2.58 percent dividend yield, Travelers’ stock hasn’t overwhelmed. And even though YCharts Pro suggests it’s undervalued, there’s reason to wonder just how much pop this stock has in it.

Here’s how Travelers has performed compared to its leading rival, Chubb (NYSE:CB) and another property/casualty competitor, Allstate (NYSE:ALL).

Allstate went with a frisky higher-risk investment strategy to boost its returns, and as a result got hammered during the bad days, as its still-ailing stock demonstrates. Travelers and Chubb, with more conservative portfolios, emerged in much better shape.

Chubb’s return on equity tends to be a bit bigger.

But Travelers tends to generate more free cash:

Although insurance shares have moved up recently, nobody has suddenly fallen in love with the sector. Instead, much of the improvement reflects hefty buybacks. U.S. insurers got lucky in the third quarter when “catastrophe” claims – read hurricane damage – proved unusually low this year, and many insurers are now using money not spent on claims to bolster their shares.

Allstate’s spending $1 billion to soak up shares, and Chubb recently said it will spend $1.8 billion to buy back just less than ten percent of its shares.

They’re pikers compared to Travelers , however, which has bought back $3.4 billion, or 11.5 percent of its shares out, so far this year, and has plans to repurchase up to $1.6 billion more by year-end.

That kind of capital-return policy cheers investors, even if the rising stock price puts a bit of pressure on Travelers’ dividend yield.

Still, a number of factors are helping suppress Travelers shares.

For one thing, the company has had a long and very expensive exposure to asbestos claims. These days, with asbestos payouts way down and apparently adequate reserves in place, further unwelcome surprises seem unlikely. But it’s a wild card.

Travelers’ short-term fixed-income portfolio has been getting squeezed by low interest rates for a while now, and as time passes, its longer-term (and higher-yielding) holdings continue to mature and be replaced with low-rate new issues. Worsening profit damage from that trend may undermine the company’s ability to continue the buybacks that have been propping up Travelers shares.

Travelers’ famously conservative portfolio also holds a big slug of munis. Those holdings continue to perform very well, company officials will tell anybody who raises the issue. But financial stresses on states and municipalities have soared, and potential defaults threaten Travelers.

Lastly, insurance pricing trends remain weak these days. So even though Travelers has a reputation as a smart and disciplined underwriter, there’s little reason to think its lackluster underwriting profits will get help anytime soon.

Bottom line: Even though Travelers knows how to handle itself, its shares could be stuck in neutral, or worse, in the coming year.

Disclosure: No position

Source: Travelers Insurance in 2011: Neutral or Worse Performance