PC360 met with Michael LaRocco, CEO of Fireman’s FundInsurance, on March 8 in Manhattan in the offices of the insurancecarrier’s parent company, the financial-services giant Allianz. Theinterview took place in a 49^th-floor conference roomwith a commanding view of Central Park. “The view is paid for bythe asset-management side of the business, not the property andcasualty side,” Mr. LaRocco joked, as we sat down for ourtalk.

In our discussion, Mr. LaRocco was funny, frank and filledwith spirited opinions about what the industry does well—and whereit needs to improve. He peppered his speech with informalphrases—including noting that his company has a lot of “cred” whenit comes to environmental issues (“I drop that cred word because Ihave two young daughters”).

The conversation ranged from the state of the current marketto his growth strategies for Fireman’s Fund to the relationshipwith Allianz. He also discussed the future of regional carriers;the industry’s image problem and its impact on recruiting toptalent; and what keeps him up at night.

PC360: Why don’t we start with your assessment of theAmerican commercial market in 2011.

It’s definitely not too good. There is no indication that theprices are going to do what they need to be doing, which is goingup. The underlying costs of the commercial lines business arerising, the cost to repair buildings, the cost to repairautomobiles, the cost to repair people—all are rising. As such,prices should be going up. At Fireman’s Fund, we are staying verydisciplined on our pricing; we are increasing our ratesappropriately. So it’s frustrating and very disappointing to seethe lack of discipline in the industry. It’s bad behavior, and theindustry should be ashamed of itself.

PC360: What do you think might be the catalyst toactually cause the industry to start to change?

The sad thing is, I don’t know that there’s one single catalystthat could do it. The only catalyst is not one that we want tothink about which is a devastating incident that we pray neverhappens. But even a single large catastrophe, I’m not sure would beenough. I guess the only positive indicators are that it looks likecompanies have begun to run out of gas in the tank from prior-yearreserve releases.

But there’s so much capital in the industry, and there’s nowhereto spend it, so companies are trying to say with all this capitalwe need to grow, and let’s invest in our growth even if it’s atprices we know are insufficient. So I don’t think there’snecessarily one event that will turn it. It’s just going to be thiscontinuing erosion of profitability. But hopefully there will be anawakening of leadership that prices need to rise because costs arerising.

PC360: Both near-term and mid-term, how are you lookingto grow the business?

Our first goal is to make an underwriting profit on each of ourlines of business. So at the end of the day if we can’t growbecause we have discipline around underwriting profit that will besomething we’ll have to accept. But it’s still a very inefficientmarket, so there are lots of opportunities for us to grow. Thereare some areas of the country where we don’t have a large amount ofvolume, so there are opportunities on a geographic basis. There areproduct opportunities: highly protected risk is an area where we’regrowing. We’re seeing some significant growth in our entertainmentcenter. We’re seeing small business growth. We fully anticipatethat we can grow this year.

Companies like ours, we’re not just disciplined around price,but we’ve gotten much better at what I call product management. Sowe really understand how to match rate to risk at a more detailedbasis than we’ve ever done before. And the more segmentation youcan bring, particularly in the commercial lines space where ithasn’t traditionally been part of the approach to the business,you’re going to find segments of the business that are available toyou. So we believe if you really look at the pricing and the lackof efficiency in the marketplace, there’s opportunity outthere.

Are there specific geographic regions that you’relooking at? And can you segue from that into your relationship withindependent agents and any changes you have planned on thatfront?

There’s a whole bunch of the country where we don’t have a lotof business so it’s hard for me to specifically say we like thisarea a lot. But if I look at the map of the U.S., certainly thereare major areas in the middle of the country, the Midwest states,where we see some significant opportunities. There are areas in theSouthwest, whether it’s Arizona, Texas, New Mexico or Nevada. Andthe Southeast presents opportunities

I consider us a relatively small P&C company in the greaterscheme of things, and when you’re our size, there’s not a whole lotof geographic areas that aren’t available. How does that relate tothe independent agents? In a pretty significant way because we arean independent-agent-only company; there’s not a lot of us left outthere. So if I’m an independent insurance agent and looking for anefficient partner—particularly an independent-agent-only companythat’s also national, that has the combined financial strength ofAllianz and Fireman’s Fund, and that also has everything frompersonal-lines auto all the way through complex commercial riskexpert lines of business—we really fit that bill.

So there are opportunities to expand our independent agentbase—and not at the cost of our current agents, but into areaswhere geographically we don’t have as much presence. And there’sreal opportunity within the agencies that we already existto write more business. We have not, by any stretch, maximizedthose relationships.

PC360: Much of Fireman’s Fund business today occurs westof the Rockies, and you have very heavy exposure in California. Howdo you feel about business in California in general, whether it’sentertainment or earthquake risks? Are you overexposed inCalifornia?

We’re really not. We love California, it’s home-field advantagefor us. And we have a terrific ability to map our risk andexposures, whether it’s earthquake-related in California orwind-related in areas like Long Island and the Gulf Coast states.Our interest in expanding is not about not being in California;it’s just that we want to grow and we want to truly be a nationalcompany and to be that you’ve got to be able to write across allthe geographies. And as we write more risk that is moregeographically spread, I can take my capital and spread it moreefficiently than in just cat exposed areas. That’s good for me,it’s good for Allianz, and it’s good ultimately for our consumersbecause it makes us a better company.

PC360: Talk about the relationship withAllianz.

For Fireman’s Fund, it’s a huge advantage. I can give you just acouple of obvious examples, but they’re important ones. As we wentthrough this horrific economic crisis that obviously we’re stillnot completely out of, being part of Allianz was a huge advantageto us because Allianz very proudly did not go down some of the poorinvestment roads that others did; it is a very conservativeinvestment company and is very financially strong. So we could lookat our customer, both our agent customer and our policyholdercustomer, and with great pride say that we stand by them and we’reready to meet our obligations around claim payments. And whilefinancial stability has always been important to customers, whetherhigh-end commercial customers or personal-lines customers, they aremuch more aware and asking questions around, “Who am I with? I wantto validate that I’m with a company that will be able to meet itsfinancial obligations to me.”

The second piece is that Fireman’s really needed to invest inour infrastructure. Our infrastructure was outdated and reallyneeded to be brought up to speed, primarily in the technologyspace. And Allianz, even in the midst of the worse economicrecession since the 1930s, invested in us. And I don’t know that Icould have been part of any other organization that would have beenbold enough at those difficult times to choose to invest. So as themarket does become more appropriately priced and returns tomatching the rate to the risk and the rates to the cost that we’reseeing, we’re going to be ready for that movement.

And as you look to expand across the US and become atruly national player, can you talk about the future for thesmaller and mid-sized insurance carriers? Is there a future forthem?

The smaller regional carriers are going to have to find theirunique niches and play in that space. The reality is, there’s somuch consolidation within the distribution side of our businessthat the distributors are clearly becoming national in their ownright or at least super-regional. And so they expect to be partnerswith companies that can match their reach, whether it’s productreach or geographic reach. And so the opportunity for long termsignificant growth is going to be with the national players who canmeet the needs of their distribution channel and the evolvingcustomer.

And the second challenge facing regional carriers is technology;you’re going to have to invest in technology. We are finallybecoming a much more technology-driven industry; it has taken usfar too long, but we’re becoming much more technology driven. Andalso product: the sophistication around our products is growing,not just in the coverages but in the way they’re designed from apricing standpoint. And to do that, you’ve got to invest inresources.

What about talent attraction and retention? It’sparticularly a challenge for the insurance industry—what are youdoing at FF to address it?

The industry has been almost borderline pathetic in that wehaven’t really been able to attract people as much as we should,and it’s a shame because insurance is a powerful, very excitingindustry. What we do is such important work. We protect individualsand businesses, and we do it really well—but somehow we allowourselves to be painted in a negative light.

What can the industry do to improve itsimage?

The industry has not been able to come together on issues justin general; it has always been fractured: regionals versusnationals, agencies versus direct response, some companies thinkingof national issues, some of state issues. We’ve always managed toseparate on a lot of critical issues, but if there is one areawhere we should be able to unite, it’s around a public PR campaignabout all the good things we do as an industry. We also have tomake ourselves more attractive to this next generation by talkingabout what the industry really is all about—product development andanalysis and data and technology and creativity and leadership.There are lots of really cool and fun jobs in our industry, andwe’ve got to get out there on college campuses and on TV and radioand create a PR campaign around what a great industry this is

How do you envision that PR campaignunfolding?

Here’s what I see: A big Hartford stag walking down the streetwith a gecko on its back holding a Traveler’s umbrella, andthey’re about to get hit by a car and a firefighter with aFireman’s Fund hat saves the day, and then you’ve got thecampaign.

The classic CEO question: What keeps you up at night?What are you most worried about?

Can we continue to build an employee population that reallythinks like owners and feels like owners and feel licensed andempowered to do their job? Because at the end of the day if youhave a strong culture within your organization of people who reallycare, people who are really committed, all kinds of good thingswill happen. And a lot of the problems that you have to face,instead of facing them with a handful of leaders, you’re facing itas an entire team of people. So I think about the culture a lotwhen I wake up in the middle of the night. We understand we’re afor-profit company, we understand that the bottom line is critical,but we also understand that it has to mean something to be a partof Fireman’s Fund. Employees need to really feel that purpose, tohave an emotional connection.

Clearly, you also always worry about catastrophic events andyour exposure to those and making sure you’ve managed your risk.And then a third piece would just be around technology. It’s aslippery slope: You’ve got to invest , you’ve got to keep up, butit’s such a constantly changing dynamic that it’s something you’vegot to be smart about to leverage those investment dollarseffectively.

It’s fair to say that you’ve built a good reputationover your career for investing in technology to get smart aboutpricing. Can you elaborate about what you’re doing on thisfront?

We’re a very small writer today of automobile insurance, but wewant to become a broader writer. We also want to writemiddle-market homeowners as well. And if you write in auto and homein the general market across the U.S., to do that in this day andage you have to have sophisticated products which meansmultivariate models and the ability to match rate to risk at a verysegmented level. And to do that you have to have a sophisticatedquote-and-issue-type technology platform. So that’s where some ofthe investments we’ve been making over the last couple of yearshave been.