The information content of the Solvency II ratio relative to earnings

We examine the information content of disclosures of solvency and earnings information of European insurance companies under the Solvency I and Solvency II regulatory regimes. Using an event-study research design, we investigate a sample of 571 announcements of 46 insurance firms during the 2012–2018 period. We find that under the Solvency I directive, investors find unexpected earnings to be informative but not the unexpected solvency ratio. However, under the Solvency II directive, both unexpected earnings and the unexpected solvency ratio are relevant to investors. Based on a decomposition of explained variance, we find that under the Solvency II directive, investors' attention has partly shifted away from earnings information toward solvency information. Our results indicate that the disclosed solvency ratios contain value relevant information under the risk-based Solvency II framework and that the requirements under this framework shift investor attention toward solvency information and away from earnings of European insurance companies.