2 Insurers to Buy, 1 to Avoid

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Financials may still present a bad memory for many investors, but that's exactly the point: The sector is overly beaten down. With that said, there are some stocks where risk still outweighs reward, mainly due to operational inconsistency and the presence of a preferable competing investment.

MetLife (NYSE: MET): Don't Let Risk Deter You

Analysts currently recommend buying shares of the life insurer - rating it a 1.9 out of 5, where "1" is a "buy." At a respective 5.7x and 6.5x past and forward earnings with a dividend yield of 2.1%. It has nearly double the volatility of the broader market and is thus exposed to a significant degree of risk. But, given the price target of $45.14, the reward, in my view, far outweighs the risk.

Like all insurers, MetLife tracks the equity market and is thus a strong bet on the macro-economy. All of the last five quarters have exceeded expectations by an average of 6.2%. 2Q12 performance was notably strong with EBIT of $1.33 per share representing an 18% y-o-y return. Momentum in underwriting shown through as dental and disability performances exceeded market expectations. Towards mitigating risk, the company lowered variable annuity sales by 34% y-o-y.

Going forward, I am optimistic about the company's decision to introduce an asset management business, called MetLife Investment Management. As companies seek to expand in scale, the private-placement debt market will continue to grow. I find that, compared to government debt, this fixed-income asset will outperform. Perhaps most importantly, management is committed to penetrating emerging markets, as evidenced by the 19% growth in Latin America.

Lincoln National (NYSE: LNC): Stay on the Sidelines

Compared to MetLife, Lincoln National has weaker risk/reward. It is currently rated around a "hold" on the Street and only forecasted for 8.7% annual EPS growth over the next five years - perhaps too high in light of recent negative growth. Prudential (NYSE: PUK) easily is preferable, since it actually generated 8% annual EPS growth over the last five years and is expected to improve 100 bps more on an annual basis.

On the positive side, the balance sheet has become more flexible, and ROE of 12% indicates that the company is delivering on its strategy. The repurchasing of $150 million shares in the recent quarter also showcases confidence over the long-term fundamentals. With that said, I am skeptical about the company's attempts to navigate a low interest rate environment, such as by expanding the Protected Funds solutions package. Furthermore, I believe that Lincoln is more vulnerable than peer Prudential to low interest rates.

Despite a difficult environment, Prudential has delivered excellent performance over the last half year. And even though the outlook is weak in western economies, the company is well positioned to capitalize off of positive secular trends in Asia where it is expanding. Even in the domestic market, Prudential is benefiting from a baby boomer generation. This combination of exposure to emerging markets and superior track record renders Prudential a "buy" over Lincoln National.

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