FedNat shares plummet following downgrade; broader markets await Fed

Insurance stocks were mostly down in a week highlighted by a ratings downgrade that could have major implications for a Florida homeowners company.

The wider markets lost ground as the Federal Reserve signaled its willingness to start ratcheting up interest rates in an effort to fight inflation. Fed Chair Jerome Powell on April 21 said a half-point interest rate hike could be "on the table" when the central bank's governors meet in early May.

The S&P 500 slid 2.75% to close the week ending April 22 at 4,271.78. The S&P 500 Insurance index dropped 2.26% to 584.97.

Already trading barely over $1, FedNat Holding Co. shares this week lost more than half their value as investors digested the impact of Demotech downgrading the financial stability rating of FedNat's main insurance entity. That downgrade threatens FedNat's future. Demotech President Joe Petrelli said the insurer needs to raise additional capital to handle expected losses in upcoming quarters.

The insurer has since entered into an agreement with the Florida Office of Insurance Regulation to present a plan to show it can secure and maintain a financial stability rating acceptable to the secondary mortgage market by April 29.

FedNat finished down 51.85%.

Inflationary pressure has been negative for insurance stocks, CFRA analyst Cathy Seifert said in an interview. Claims cost inflation remains an issue, particularly for auto insurers, including big names like The Progressive Corp. and The Allstate Corp.

Allstate lost ground this week as the company estimated pretax catastrophe losses for March of $227 million, or $179 million after tax, with pretax catastrophe losses for the first quarter totaling $462 million. It closed the week down 6.44%.

Progressive shares lost 3.36% during a week in which the company was downgraded by Piper Sandler to underweight from neutral. In a note to clients, analyst Paul Newsome slashed his price target on Progressive to $100 from $113 as the insurer recorded "disappointing" results for the month of March.

Illinois-based RLI Corp. was among the insurance industry's leaders for the week, even though its first-quarter net earnings dropped to $47.9 million, or $1.05 per share, from $73.0 million, or $1.60 per share, in the prior-year quarter.

RLI soared 7.89% for the week.

Seifert said rising interest rates could be a positive for life insurers, though the group may also continue to feel the impacts of COVID-19 in its first-quarter results.

Globe Life Inc.'s shares rose despite posting a year-over-year decline in net income in the first quarter. The insurer's first-quarter net income declined to $164.4 million, or $1.64 per share, from $178.5 million, or $1.70 per share a year earlier. Globe Life finished up 0.51%.

Genworth Financial Inc. and Unum Group's shares rose 2.13% and 1.65%, respectively, during the week, while MetLife Inc. and Prudential Financial Inc. slipped 1.53% and 1.20%, respectively.