* ECB rate cut could affect savings products
* Data show outflows from European insurers
* Insurers have underperformed banks this year
By Sudip Kar-Gupta
LONDON, May 20 (Reuters) - European insurers are likely to miss out on any market rally the European Central Bank ignites by loosening policy at the start of next month.
The prospects of interest rate cuts, or other steps by the ECB to protect Europe's economic recovery, have bolstered European equities this year. Benchmark indexes such as Germany's DAX have touched all-time highs.
However, analysts and investors said any boost from an ECB rate cut or stimulus measures such as quantitative easing (QE)would probably hurt European insurers. Those measures would cut into bond yields and undermine sales of savings products, since the returns on those products would be affected.
"If ECB QE were to drive bond yields materially lower, this would be a negative for the insurance sector, given the gap between return guarantees they have on some of their products and European bond yields would widen even further," said Morgan Stanley European equity strategist Graham Secker.
"However, this negative effect may be partially offset by a further spread tightening in southern European bonds, which has a positive influence on the asset side of their balance sheet," he added.
The International Monetary Fund on Monday urged German life insurers to ensure they were protected against the consequences of low interest rates.
Thomson Reuters Datastream graphics show that while European insurance stocks have risen over the last two years, in line with a strengthening in the euro, this correlation has started to turn negative over the last year.
A rate cut would weaken the euro. Insurance stocks could then lose ground, even though equity markets overall would probably rise as a weaker euro helped Europe's exporters.
Graphic on European insurers vs euro:
An ECB rate cut also would probably help bank shares, which tend to outperform when stock markets rise. That would accentuate the underperformance of insurers compared with banks.
The STOXX Europe 600 Insurance Index has already fallen around 1.5 percent in 2014, underperforming a 1 percent gain in the STOXX Europe 600 Banking Index.
"The insurers have underperformed a lot already, and a rate cut would not help with their savings products, nor their yield products," said Royal London Asset Management's European equities fund manager Andrea Williams.
In addition, more stringent capital requirements for insurers, under a new regulatory framework known as "Solvency II", have caused insurers to cut back on equity holdings. That means they are less likely to cash in on any stock market rally.
Barclays equity analysts said UK life insurers, such as Prudential Plc and Legal & General, may outperform their European peers if the ECB cuts rates, since they were more geared towards the equity markets.
Insurance investors have already started to head for the exit, according to exchange-traded-fund data.
Since the start of 2014, funds covering European insurers have seen net outflows of $75.5 million - far more than the net $47.3 million over all of 2013, according to ETFGI.
Earnings growth in the European insurance industry is also expected to lag the broader market next year, according to Thomson Reuters StarMine data.
StarMine's SmartEstimate - which favours top-rated analysts - forecasts that earnings in the European insurance sector will grow 7.4 percent next year. Earning for the European STOXX 600 index are forecast to grow 13.2 percent.
"The insurers are seeing negative revenue growth and negative price momentum," said Sunrise Brokers' equity strategist Christopher Mellor. (Additional reporting by Vikram Subhedar; Editing by Lionel Laurent, Larry King)