Something strange is happening at Kemper Corporation. On the surface, everything seems rosy. Their Specialty P&C business is exceeding target margins. Their cost-cutting initiatives are exceeding expectations. They're even projecting a return to double-digit ROE this year. Yet, there's an elephant in the room, a glaring anomaly that's causing investors to scratch their heads: plummeting policies in force (PIF).

Kemper acknowledges this decline, attributing it to deliberate restrictions on new business throughout 2023. They claim this was a necessary sacrifice to restore profitability, a strategy they now deem successful. But here's the catch – even as they tout their return to profitability and their 'brisk' plans to re-expand new business, their actions suggest a different story. A story of calculated restraint, a slow-burning fuse leading to a potentially explosive payoff.

Kemper is drip-feeding new business back into the system, likening the process to shifting gears in a manual transmission. While applications have increased substantially, they're still nowhere near pre-restriction levels. This careful approach, they argue, is necessary to avoid operational hiccups and maintain underwriting discipline. However, it raises a crucial question: why not capitalize on the current hard market, characterized by high demand and limited capacity? Why not aggressively grab market share while competitors struggle?

This brings us to Kemper's intriguing confession: they admit to deliberately targeting a 96 combined ratio in their Specialty P&C business, a metric they are currently exceeding. Now, maximizing growth at a target combined ratio is a perfectly sound business strategy. But Kemper's current performance suggests they could comfortably push for significantly more growth without jeopardizing their target profitability.

Let's look at the numbers:

Kemper earned 9 points of rate in Q1 2024, leaving a whopping 15 points of approved but unearned rate still to come. This is a significant tailwind, especially when compared to the projected loss trend of around 7% to 8% for the year. Even if we factor in the 'new business penalty' – the slightly higher loss ratio typically associated with new policies – Kemper has ample room to accelerate growth without endangering their 96 combined ratio target.

So, what's the game?

Here's a possible hypothesis: Kemper is playing the long game, strategically sacrificing short-term growth for a potentially massive reward down the line. They're aware of the market's fixation on PIF growth. By deliberately constraining supply, they're creating pent-up demand that they can unleash when the time is right. This pent-up demand could translate into explosive growth in 2025 and beyond, significantly exceeding their pre-pandemic growth rates of 6% to 13%.

The potential impact on valuation is immense. Imagine Kemper suddenly shifting from a narrative of declining PIF to one of double-digit growth, all while maintaining target profitability. The market, starved for growth stories in the specialty auto space, would likely reward them handsomely. This could explain Kemper's insistence on maintaining a low profile regarding their reciprocal exchange, a potential powerhouse that they seem to be deliberately keeping under wraps.

New Business Applications Growth

The following chart shows the growth of Kemper's new business applications, based on the information provided in the Q1 2024 earnings call transcript.

Of course, this is just a hypothesis, a possible explanation for Kemper's seemingly paradoxical behavior. It's possible they're simply being overly cautious, prioritizing operational stability above all else. But the numbers tell a compelling story, a story of deliberate restraint and a carefully orchestrated strategy.

Only time will tell if Kemper is indeed playing a high-stakes game of delayed gratification, sacrificing short-term growth for a potentially massive payoff. But one thing is clear: their actions are raising eyebrows, sparking intrigue, and suggesting a deeper narrative than what meets the eye. Keep your eyes on Kemper – their next move could be a game-changer.

"Fun Fact: Kemper Insurance can trace its history back to the early 20th century, starting as a small mutual insurance company catering to farmers. From its humble beginnings, it has evolved into a multi-billion dollar national insurer."