Insurance companies have been aggressively purchasing bank stocks this year, raising concerns about some insurers exploiting low price-to-book ratios through long-term equity investment accounting tricks to temporarily beautify their financial statements—a practice likened to "drinking poison to quench thirst" for troubled institutions.

In Q3 2024, insurers continued their bank stock shopping spree. Wind data shows insurers appeared among the top 10 shareholders of 23 A-share listed banks, with holdings worth 316.5 billion yuan (excluding Ping An Bank). Bank stocks' defensive characteristics—low valuations and high dividends—align perfectly with insurers' dual needs for safety and returns, making them portfolio "ballast stones."

However, warnings emerge about problematic insurers leveraging most banks' sub-1 price-to-book ratios to artificially enhance financial statements, creating "paper wealth" on balance sheets that masks potential bubble risks.

Take Xingfu Life Insurance's case: While reporting 195 million yuan net profit in 2024 (a turnaround from losses), its operating losses actually reached 982 million yuan. The profit came mainly from 1.228 billion yuan non-operating income—achieved by reclassifying Nanjing Bank shares as long-term equity investments, ballooning this balance sheet item from 431 million yuan (2023) to 5.578 billion yuan.

This accounting maneuver isn't new for Xingfu. In 2020, after increasing Nanjing Bank holdings to 4.07% (becoming fifth-largest shareholder) and appointing a board supervisor, it similarly converted the investment classification, turning 233 million yuan operating losses into 97 million net profit via 322 million non-operating income.

The trick works because most bank stocks trade below book value. By switching from fair-value accounting to long-term equity investment classification, insurers book the higher net asset value instead of market price, with the difference recorded as non-operating income—creating instant "paper wealth." Major insurers like China Life and PICC have used this technique, with their book values for Guangdong Development Bank and Industrial Bank holdings exceeding actual market values by tens of billions.

This three-step financial engineering carries hidden dangers: 1. Purchase stocks with price-to-book ratios below 1 2. Gain significant influence (e.g., via board seats) upon reaching certain ownership thresholds 3. Reclassify holdings as long-term investments, booking the asset value gap as one-time income

The critical flaw? This wealth is illiquid. Over time, these accounting entries grow uncontrollably: - Dividends received reduce the investment's book value rather than counting as income - With typical bank payout ratios around 30%, the book value inflates annually (e.g., a 10% stake in a 10-billion-yuan-profit bank would show 800-million-yuan book value growth after accounting for 200-million-yuan dividends)

PICC's case illustrates the snowball effect: Its 2012 17-billion-yuan Industrial Bank investment now shows 100.2 billion yuan book value (62.5 billion market value)—a 37.7 billion gap that grew 111% since 2016. Though PICC claims no impairment is needed, for struggling insurers, such inflated assets could become financial "malignant tumors."

The trend spreads among mid-sized insurers. For example: - Xintai Life reportedly boosted profits by billions after reclassifying Beijing Bank and Zhejiang Bank shares - Troubled Hongkang Life aggressively bought Zhengzhou Bank H-shares (22.14% of H-share float) and became Sunong Bank's fourth-largest shareholder (4.95% stake)

Experts warn that while bank stocks offer appeal amid "asset shortages," this accounting gambit represents dangerous short-termism for vulnerable insurers—potentially turning long-term investments into "dead water assets" that could abruptly worsen financial crises when reality strikes.