An Empirical Analysis of Market Reactions to the First Solvency and Financial Condition Reports in the European Insurance Industry

• Author: Nadine Gatzert,Dinah Heidinger
• Date: 01 June 2020
• Published date: 01 June 2020
• DOI: http://doi.org/10.1111/jori.12287

ANEMPIRICAL ANALYSIS OF MARKET REACTIONS TO THE

FIRST SOLVENCY AND FINANCIAL CONDITION REPORTS

IN THE EUROPEAN INSURANCE INDUSTRY

Nadine Gatzert

Dinah Heidinger

ABSTRACT

In 2017, insurers in the European Union disclosed their Solvency and Financial

Condition Reports (SFCRs) according to the third pillar of Solvency II for the

firsttime. The aim of thisarticle is to empiricallyanalyzemarket reactionsto the

firstSFCRs for all publiclylisted insurersin the EuropeanUnion that published

an English report based on an event study. We thereby investigate which

key figures and textual attributes matter most to investors, using regression

analyses and text mining approaches. We also discuss potential areas for

improvementconcerning SFCR disclosure, such as a central public disclosure

platformand further standardization of disclosure requirements, which could

further enhance the goals of transparency and market discipline in relation

to Solvency II’s Pillar 3. Our results show t hat SFCR key figures matter more

than textual features. Specifically, we find a significantly positive market

impactof the solvencyratio calculatedwithouttransitionalsor adjustmentsand

a significantly negative one for the solvency capital requirement(SCR).

INTRODUCTION

The third pillar of Solvency II requires insurers in the European Union to disclose

various reports to increase transparency and market discipline, among them the

Solvency and Financial Condition Report (SFCR), which is intended for the public.

1

Nadine Gatzert and Dinah Heidinger are at the Friedrich-Alexander University Erlangen-

N€

urnberg (FAU), School of Business and Economics, Lange Gasse 20, 90403 N€

urnberg,

Germany, Tel.: þ49 911 5302 884, nadine.gatzert@fau.de, dinah.heidinger@fau.de. The authors

would like to thank two anonymous referees as well as Martin Eling, Hendrik Scholz and the

participants of the Annual Seminar of the European Group of Risk and Insurance Economists

2018 in Nuremberg, the Annual Meeting of the American Risk and Insurance Association 2018

in Chicago, and the Annual Meeting of the German Insurance Science Association 2018 in

Munich for valuable comments and suggestions on an earlier version of this article.

1

Pillar 1 of Solvency II provides regulatory capital requirements, while Pillar 2 refers to

qualitative requirements for governance and risk management, including the Own Risk and

Solvency Assessment (ORSA) and the supervisory review process.

©2019 The Journal of Risk and Insurance (2019).

DOI: 10.1111/jori.12287

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. Vol. 87, No. 2, 407–436 (2020).

The first of these reports were to be published in the second quarter of 2017. Since

insurers have no experience so far concerning the overall impact of SFCR disclosure,

nor the elements of SFCRs that matter most, this article aims to empirically investigate

how the disclosure of SFCRs, including key figures reported therein, as well as textual

features, induce market reactions.

As no SFCRs were previously disclosed, no empirical analyses exist on this topic.

However, numerous research studies have considered the impact of different types of

disclosures (albeit focusing on other industries than the insurance sector), such as

10-K or 10-Q files (see, e.g., Asthana and Balsam, 2001; Griffin, 2003; Loughran and

McDonald, 2011, 2014, 2015; Jegadeesh and Wu, 2013; Bonsall IV et al., 2017; Ertugrul

et al., 2017), annual reports (see, e.g., Baumann and Nier, 2004; Li, 2008; Yekini,

Wisniewski, and Millo, 2016), earnings press releases (see, e.g., Henry, 2008; Davis,

Piger, and Sedor, 2012; Henry and Leone, 2016), ad hoc filings (see, e.g., Palade,

Alfano, and Neumann, 2017), initial public offering (IPO) prospectuses (see, e.g.,

Jegadeesh and Wu, 2013), analyst reports and recommendations (see, e.g., Hsieh, Hui,

& Zhang, 2016) and news from the Dow Jones Newswires or The Wall Street Journal

(see, e.g., Tetlock, 2007; Tetlock, Saar-Tsechansky, and Macskassy, 2008). For instance,

Baumann and Nier (2004) observe that more extensive disclosures by banks lead to

significantly lower stock price volatility. Establishing a model for the effect of

accounting information, Lambert, Leuz, and Verrecchia (2007) further show that the

quality of accounting information can influence the cost of capital, both directly and

indirectly.

A large part of the respective studies also specifically focuses on textual attributes of

disclosures, such as tone/sentiment and readability (see Loughran and McDonald,

2016 and Li, 2010, for literature reviews, as well as Kearney and Liu, 2014, specifically

for tone). Many researchers find a significant relation between the tone of disclosures

and abnormal or excess returns (see, e.g., Tetlock, 2007; Henry, 2008; Tetlock et al.,

2008; Loughran and McDonald, 2011; Davis et al., 2012; Henry and Leone, 2016;

Yekini et al., 2016; Palade et al., 2017), stock return volatility or trading volume (see,

e.g., Tetlock, 2007; Loughran and McDonald, 2015), earnings forecast (see, e.g.,

Tetlock et al., 2008), return on assets (RoA) (see, e.g., Davis et al., 2012) and IPO

underpricing (see, e.g., Jegadeesh and Wu, 2013). In the context of readability,

Li (2008) observes more persistent positive earnings for disclosures that are easier

to read, and Loughran and McDonald (2014) find stronger announcement effects

for better written disclosures. In addition, Hsieh et al. (2016) show that more

readable analyst reports decrease uncertainty, such that stock returns are

significantly more positive. Conversely, Ertugrul et al. (2017) find that less

readable disclosures lead to greater future stock price crash risk and higher loan

spreads, while Bonsall IV et al. (2017) observe higher stock market volatility for

less readable disclosures.

One strand of the literature also deals with risk disclosures in particular, studying the

content, determinants and impact of these disclosures. A more detailed review is

provided in Section “Literature Review” as the basis for developing the hypotheses.

Specifically for SFCRs, some industry studies exist that compare the respective figures

of different samples, such as those by Deloitte for 61 SFCRs in Ireland (see Regan and

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