donald trump <u+2019>s election has lifted insurers stuck in the low-interest-rate swamp <u+2014>with one glaring exception. it<u+2019>s worth a second look. unlike nearly all its global peers, asian insurance giant aia group has taken a share-price hit since the trumpflation trade came into effect two weeks ago. its former parent aig is up 8%. rival prudential of the u.k. is up 13%; canadian insurer manulife . 19%. some japanese and chinese peers have rallied even harder. by contrast, aia has been down as much as 4%. there is reason for aia to worry, but perhaps not so much. its substantial businesses in asian countries whose currencies have fallen will ding earnings, which are reported in u.s. dollars<u+2014>but those are mostly translation effects. most of its local businesses are currency-matched or hedged. rising interest rates could mean paper losses on its bond portfolio, but it holds these securities to maturity, so the losses will be recovered unless there are wide-scale surrenders. aia is more sensitive to rising rates because its liabilities are heavy on the long end. almost 90% have a duration of 10 years or more, compared with only 40% of its assets, according to sanford c. bernstein<u+2019>s linda sun-mattison. part of the reason is that while it sells long-term products, bond markets in asia<u+2014>where its earnings come from<u+2014>are shallow. the saving grace: only a third of its earnings come from the so-called spread book. but there are also reasons the strong dollar should help. approximately 40% of aia<u+2019>s assets are exposed to dollars, which means that a rise of 0.5 percentage point in u.s. rates could add 2% to the insurer<u+2019>s embedded value, according to ms. sun-mattison. in aia<u+2019>s hong kong business, which accounts for a third of operating profit, 90% of policies are matched in u.s. dollars. and at the group level, 90% of working capital is invested in u.s.-dollar assets. aia generates plenty of free surplus; excluding changes in investment returns, it was up 12% from a year earlier in the six months ended may. that should keep the company<u+2019>s dividend safe. at 1.8 times forecast book value, aia is higher-valued than peers thanks to its growth, but it is trading below its own long-term average and is at its lowest in six months. aia got left behind in the postelection upswing. but it should be in for a boost eventually. write to anjani trivedi at anjani.trivedi@wsj.com
aia missed trump rally, but is ready to roll - wsj
anjani trivedi