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Market turmoil in the first quarter had a modest effect on Canadian life insurers’ investment portfolios, but a prolonged, weak economic recovery could put pressure on their capital positions, says DBRS Morningstar.

In a new report, the rating agency said the economic disruption caused by the Covid-19 outbreak has elevated credit risk for life insurers.

The report noted that fixed-income investments are the biggest component of most life insurers’ portfolios — bonds make up 68% of the combined investment holdings of Canadian lifecos, and commercial loans make up another 12%.

Stocks represent about 6% of assets under management.

In the first quarter, Canadian lifecos “experienced limited impact from credit downgrades and asset impairments” in their fixed-income holdings, DBRS said.

However, their fixed-income investments could come under pressure in the months ahead, it said — depending on the speed and shape of the economic recovery.

“As economies reopen, considerable uncertainty remains regarding the start of the global recovery,” the report said.

“Credit rating downgrades are occurring across various sectors, particularly to issuers in industries most affected by government shutdowns or with a perceived deterioration in future business prospects, such as hospitality, airlines and energy,” it said.

“An anemic economic recovery and the emergence of meaningful deterioration in asset quality over the next few quarters could pressure the capitalization of life insurance companies,” the report said.

In that case, DBRS said life insurers with higher-quality portfolios and high capital buffers will be better positioned to absorb rising credit losses.

“We believe that the sector’s robust capital buffers will help insurers to navigate the adverse changes in the credit cycle, but are unlikely to eliminate all risks,” said Hema Singh, vice president, global financial institutions, at DBRS Morningstar.