Chris Tschida, head of US insurance at Mercer, and Eryn Bacewich, Senior Insurance Investment Strategist and Chair of the insurance strategic research team, sat down to speak with Insurance Asset Risk about the advantages of its research platform and why his team continually scan the horizon for new datapoints to serve their clients.

Congratulations on your win for Investment strategy consultant of the year. My first question is, what do you think sets Mercer apart from the competition?

Chris Tschida (CT): First, thank you. We are excited about the award and recognition. I would say there are a handful of things that set us apart. The first is our experience working with insurance companies. We have a dedicated insurance team that really knows and understands the unique characteristics of insurers. For many insurers, investment strategy is highly connected to the strategy of the primary business, so the portfolio should be structured first and foremost with this in mind. The second is our enterprise risk approach —we built out the tools to link operations to investments, enhancing an insurer's ability to help evaluate risk across the balance sheet. This is important because more than ever, what an insurer is doing on the underwriting side should be connected to the investment strategy. Here, we are excited to be partnering with our colleagues from Guy Carpenter, Oliver Wyman and Marsh to look holistically at the balance sheet. Third, we also have this large, research platform that runs through the core of Mercer. We have over two hundred people dedicated to investment research as of December 2023. And the last thing that sets us out from the crowd is our flexible service model, which allows us to meet the specific needs of our clients.

How does all this form your day-to-day approach?

CT: It's all about Mercer's best ideas. The enterprise risk modelling sets the strategic asset allocation. Next is implementation. We're not just pushing insurance-specific research or concepts onto our clients. Overall, we see our role within the insurance team as linking up the research team to identify potential opportunities and risk across the entire research platform, and, importantly, translate those investment ideas to be relevant for insurers.

How do your clients appreciate your work and the platform?

CT: The feedback we receive from clients is that they appreciate our collaborative approach, deep resources, access to robust managers and fee savings.* **

What stands out for you as a positive so far this year?

CT: Our story this year has not just been about growing our team and expanding the tools that we use, but in winning business across the whole service spectrum. I mentioned the flexible service model—through that, we've had success when it comes to introducing our best investment ideas to prospects via our intellectual capital and deep research platform. Another area that's worked well for us this year has been in strategy-specific advisory services and special projects. Given our market presence, we see a wide breadth and depth of client issues which we have the fortune of learning from. With this learning, we can continue to reinvest into the business and continuously improve our insurance solutions capabilities.

On the other side, where have the tight spots been this year? What areas have been the ones that have required the most work?

CT: As an industry, I think insurers are going through a form of dislocation. That seems to be happening all over the economy, too. We're seeing increased volatility when it comes to pricing and underwriting risk, along with the inherent volatility within the capital markets. Increased volatility across liabilities and assets means that our insurance companies need to think holistically about the balance sheet, focusing particularly how the strategy should shift of evolve in certain market conditions. We have been hard at work to create an innovative program with our sister companies to bring clarity to these strategic tradeoffs for insurers. It is our belief that a resource as powerful as this does not exist within the market today.

We've seen interest rates shift downwards in recent months. What's your take on that?

Eryn Bacewich (EB): Over the past year, we've talked a lot about the resurgence of high-quality yield and the once a decade opportunity for insurers to boost investment income. Many insurers have taken advantage of this opportunity by adjusting the characteristics of the portfolio after re-evaluating the needs of the primary business. Some of these activities have included diversifying fixed income through a variety of ways (credit quality, balance of fixed and floating, duration, etc.) and implementing loss harvesting programs designed to both boost predictable book yield for the company and reposition the portfolio into areas of the fixed income market that offer more attractive relative value. While rates have come down recently, there are still potential opportunities for insurers to optimize the portfolio. The composition of the market looks different than it did 10 years ago, so it is important for insurers to think through the changing nature of risk and how they can help ensure they are well-compensated for the risk they take within the investment portfolio.

Where do you see the opportunities for next year?

EB: Given the changing nature of risk, we see opportunities to help ensure sufficient sources of diversification within each of the major asset classes (fixed income, equity, and alternatives). Optimizing fixed income will be key as we've seen the bond / equity correlation relationship shift over the last few years. There are a number of areas we find attractive within high quality fixed income (e.g., CLOs and high quality securitized). Then, depending on an insurer's specific objectives and risk tolerance, there are a number of potential opportunities within equity and below investment grade fixed income as well. In general, looking at the world today and the abundance of uncertainty market participants are faced with (diverging central and fiscal policies, geopolitical tensions, inflation, and growth), investors are best protected by diversifying across the capital stack in areas that can still compensate for the risk.

Looking ahead, where are the areas that you feel might be the most dangerous next year?

EB: Despite the Fed cutting interest rates recently, with interest rates being as high as they have been for so long, we are likely to see defaults/downgrades to tick up slightly. We also see some idiosyncratic risks in commercial real estate that is still likely to continue playing out. Credit selection and flexibility will be key in the coming year. However, it is important to note that where there is risk/stress in the market, there is also likely to be opportunities. In this environment, there is likely to be opportunities for distressed liquidity providers.

What will your approach be if interest rates do climb again?

CT: Despite unrealized losses within insurance company investment portfolios as rates rose following the pandemic, insurers were faced with a renewed landscape of investment opportunities marked by the ability to generate sufficient returns with less risk. If rates were to move up again, we would likely continue to see insurance companies looking for ways to take potential advantage of the opportunity to increase predictable book yield for their companies in the intermediate term and further derisking.

Any concluding thoughts? Something that you would like IAR readers to know?

CT: I'd say the most-important thing about us is that we're a growing team who's got the tools and resources to meet the needs of the industry it serves, regardless of where they are at in their journey. We enjoy collaborating with industry participants and are excited about the opportunities we see in our future.