Against the backdrop of declining interest rates and an "asset shortage" becoming the industry norm, the insurance sector, with its massive "patient capital," is facing mounting asset-liability matching pressures.

To secure long-term, stable returns, insurers are increasingly turning to long-term equity investments (LTEIs), particularly in bank stocks trading below book value (PB < 1), as a tool to achieve asset-liability matching and stable income.

However, this strategy has sparked ongoing debate. On one hand, it is seen as a stabilizing "ballast" for insurers to navigate economic cycles, embodying a long-term approach to secure steady ROE (Return on Equity) and dividend yields. On the other hand, some insurers have repurposed LTEIs as a form of "advanced financial engineering," leveraging specific accounting standards to artificially inflate profits and net assets in the short term, masking underlying operational strains.

This "paper wealth" illusion, while offering temporary relief, may conceal deeper risks. Professor Zhu Junsheng, a postdoctoral fellow in applied economics at Peking University, notes that LTEIs often create a disconnect between accounting treatment and economic substance. When used as a "reporting tool" rather than a genuine strategic allocation, they can systematically distort profits, net assets, and risk disclosures.

**The Accounting "Magic"** LTEIs were originally intended to reflect a long-term investment philosophy focused on stable returns. However, under current rules, they have morphed into an immediate "reporting trick," particularly effective when investing in stocks trading below book value.

This "magic" doesn’t rely on stock price appreciation but rather on a one-time accounting reclassification. Typically, insurers record stock purchases as either "financial assets at fair value through profit or loss" (FVTPL) or "financial assets at fair value through other comprehensive income" (FVOCI). Both methods expose insurers to volatility in earnings or net assets due to market fluctuations.

LTEIs offer an alternative. Under new accounting standards, if an insurer gains "significant influence" over an investee (e.g., by appointing a board member), the investment can be reclassified as an LTEI and accounted for using the equity method. Here, the initial cost is the higher of the purchase price or the proportional share of the investee’s net assets. If the purchase price is below book value (PB ≤ 1), the difference is recognized as a one-time gain in the income statement.

For example, if an insurer spends RMB 10 billion to acquire a 3% stake in a bank trading at PB 0.5x, the proportional share of net assets would be RMB 20 billion. The RMB 10 billion difference is booked as "non-operating income," instantly boosting profits—despite no actual cash inflow.

**Short-Term Gains, Long-Term Risks** This practice, while permissible under accounting rules, essentially front-loads potential future valuation gains, creating a timing mismatch. Professor Zhu warns that while it inflates short-term profits and net assets, it doesn’t equate to real cash flows or sustainable returns.

**The Allure of Financial Engineering** In today’s low-rate environment, insurers—especially smaller ones—are drawn to LTEIs due to multiple pressures: 1. **Yield Squeeze**: With 10-year government bond yields below 2.5%, traditional fixed-income assets no longer cover liability costs locked in at higher rates (e.g., 3.0–3.5% for traditional life policies). 2. **Regulatory Arbitrage**: New accounting standards’ volatility prompts insurers to favor LTEIs’ smoother equity-method accounting. 3. **Solvency Pressures**: LTEIs offer a quick fix to improve solvency ratios and profit metrics, albeit artificially.

**Strategic vs. Tactical LTEIs** Not all LTEIs are problematic. A "good" LTEI is genuine "patient capital," deriving returns from high ROE and consistent dividends—not one-time accounting gains. For instance, Ping An’s LTEI in China Yangtze Power (since 2018) has yielded cumulative dividends of RMB 5.2 billion against a cost of RMB 12.6 billion, with the investee’s average ROE at 14.8%.

Conversely, "bad" LTEIs prioritize accounting profits over cash flows, posing four key risks: 1. **Solvency Mismatch**: Inflated net assets mask true capital shortfalls. 2. **Liquidity Crunch**: LTEIs are illiquid, complicating emergency sales. 3. **Impairment Bombs**: Delayed write-downs can trigger sudden losses. 4. **Reputation Risk**: Market distrust may escalate funding costs or regulatory scrutiny.

**Regulatory and Internal Reforms** To curb abuse, Professor Zhu suggests: - Tightening "significant influence" criteria (e.g., beyond mere board seats). - Enhancing disclosure of LTEIs’ fair value assumptions and impairment risks. - Adjusting solvency risk weights for LTEIs and mandating stress tests. - Insurers should prioritize dividend cash flows over accounting gains, set concentration limits, and decouple short-term profits from executive incentives.

Ultimately, resolving insurers’ reliance on LTEIs requires addressing the root "asset shortage" by expanding long-term asset options like infrastructure REITs, preferred shares, and pension-linked investments.