With everyone bullish towards equities these days, it might seem like common sense that asset managers will be the biggest winners since they are more leveraged to the stock market than any other group, but according to research from RBC Capital Markets analyst Eric Berg, “a further rise in the stock market from current levels would likely benefit life insurers even more than such a market increase would benefit asset managers.”

Stock market relation with insurers and asset managers

The only scenarios where Berg favors asset managers over life insurance firms are if Treasury ten year yields drop or the S&P 500 (INDEXSP:.INX) drops significantly. With RBC’s base case of 100 basis point increase in yields and S&P 500 growth of 15 percent, life insurance firms would outperform asset managers by 18 percent.

life insurers v asset managers

It might seem an odd comparison to make, but Berg was interested because life insurers have outperformed asset managers YTD even though the S&P 500 (INDEXSP:.INX) has had a great year, so it seemed reasonable to ask the question: “Do we still prefer the life names over the asset management stocks, or given the difference in year-to-date appreciation between the two groups has our view on these two sectors change?”

Asset managers equity growth

Berg acknowledges that his first reaction is to say that asset managers should be favored by equity growth, but when he did a regression that took both the stock market and Treasury bond yields into account that’s not what he found.

asset manager insurers index

insurer insurer index

Insurers’ revenue generation

Berg attributes this result to the fact that life insurance companies have been generating an increasing percentage of their revenues from annuities that come with guarantees. When investors are worried that these annuities could dig into other profit streams, the life insurers trade at a deep discount. But when stock prices and interest rates go up this becomes less of a concern and the discount recedes.

“It comes down to this: The variable annuity business has been, to many investors, scary,” Berg writes. “Higher interest rates and a higher stock market make it that much less likely that a catastrophe from a variable annuity block of business will occur.”  Based on his regression model, Berg recommends Hartford Financial Services Group Inc (NYSE:HIG), Lincoln National Corporation (NYSE:LNC), and ING US Inc (NYSE:VOYA) as the three companies with the highest potential upside.