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Fed's quarter-percent rate hike unlikely to affect insurance pricing

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Wednesday's decision by the Federal Reserve to raise interest rates 0.25% could have implications for insurers seeking enhanced returns, but the pace of change may be slow, analysts said Thursday.

Insurance executives had been decrying the “low rate environment” throughout 2015. Better investment returns cold lead to more aggressive pricing, but not right away, sources said.

“We assume higher investment returns would eventually pressure pricing, but we think near-term impact is too incremental and uncertain for insurers to make pricing changes based on the current outlook,” Cliff Gallant, San Francisco-based analyst for Nomura Securities International Inc., said in a research note.

Fitch Ratings Inc. also said that only time will tell the ultimate effect on life insurers.

“U.S. life insurers' potential gain from further Fed rate hikes over the coming year could be muted if long-term rates remain largely unaffected,” Fitch said in a research note.

“While yesterday's Federal Funds target rate increase was expected, how further rate hikes affect credit fundamentals and the longer end of the yield curve is still to be determined,” added Fitch.

And while the hike is welcome, it still leaves rates historically low, according to Moody's Investors Service Inc.

“Life insurers will benefit from a gradual improvement of investment returns, particularly those companies that have written significant policies that provide guaranteed rates to policyholders. But the low interest rate environment relative to historical levels will continue to pressure insurers' profitability,” Moody's said in a report.