Unico American Corporation (NASDAQ:UNAM) is an insurance holding company that has faced significant headwinds in recent years as its insurance subsidiary, Crusader Insurance Company, has been placed into runoff. The company's financial performance has been severely impacted, with annual net income of -$5,673,251, annual revenue of $36,388,384, annual operating cash flow of -$7,510,147, and annual free cash flow of -$8,196,052 in the latest fiscal year.

Business Overview

Crusader Insurance Company, Unico's primary operating subsidiary, was the main driver of the company's historical revenue and profitability. However, in 2021, Unico took actions to cause Crusader to enter into runoff, ceasing the writing of new and renewal business and winding down operations that supported the issuance of insurance policies. This strategic shift has had a profound impact on Unico's financial results.

Financials

In the third quarter of 2022, Unico reported total revenues of -$2,529,890, a significant decrease from the $8,595,648 reported in the same period of the prior year. This decline was primarily attributable to the runoff of Crusader's operations, which resulted in a 85% decrease in gross earned premium to $1,621,122 and an 86% decrease in ceded earned premium to $457,103, compared to the third quarter of 2021.

The company's net loss for the third quarter of 2022 was $5,046,323, compared to a net loss of $2,510,198 in the same period of the prior year. This increase in net loss was driven by the significant decrease in revenue from Crusader's insurance operations, as well as a $4,447,570 intent-to-sell impairment loss on the company's fixed maturity investments.

For the nine months ended September 30, 2022, Unico reported total revenues of $7,288,941, a 74% decrease from the $28,199,908 reported in the same period of the prior year. The company's net loss for the nine-month period was $8,845,164, compared to a net loss of $1,649,305 in the same period of the prior year. The decrease in revenue and increase in net loss were primarily due to the same factors that impacted the third quarter results.

Liquidity

Unico's liquidity position has also been significantly impacted by Crusader's runoff. As of September 30, 2022, the company had cash, cash equivalents, and restricted cash of $13,338,955, compared to $15,626,651 as of December 31, 2021. The decrease in cash was primarily due to the use of cash to fund Unico's operations and the runoff of Crusader.

The company's investment portfolio has also been affected by the runoff of Crusader. As of September 30, 2022, Unico's total investments were $47,520,595, a significant decrease from the $77,999,308 reported as of December 31, 2021. This decline was primarily due to the liquidation of investments to support Crusader's operations and the $4,447,570 intent-to-sell impairment loss recorded in the third quarter of 2022.

Unico's financial performance has been further impacted by the company's inability to receive dividends from Crusader. The California Department of Insurance (CA DOI) has prohibited Crusader from paying dividends to Unico through 2025, which has limited the holding company's access to cash and liquidity.

Risks and Challenges

The company's challenges have also been exacerbated by the CA DOI's supervision of Crusader through the Administration Supervision Agreement, which imposes significant restrictions on Crusader's ability to make payments and engage in certain transactions without the prior written consent of the CA DOI Commissioner, the Special Examiner, or the Special Examiner's appointed representative.

Unico's management has been actively exploring strategic alternatives to address the company's liquidity concerns and meet its capital obligations, including potential strategic financing, further scaling back or eliminating some or all of its remaining business operations, expense reductions, reorganization, merger with another entity, filing for bankruptcy, or cessation of operations. However, the company's ability to pursue these alternatives is largely dependent on continued financial support from Crusader, which may not be forthcoming.

The company's geographic concentration in California also poses a risk, as Crusader's business remains heavily concentrated in the state, accounting for 100% of its gross written premium during the three and nine months ended September 30, 2022, and 2021. This lack of diversification exposes Unico to the economic and regulatory conditions in a single state.

Financial Ratios

Unico's financial ratios reflect the challenges the company is facing. As of September 30, 2022, the company's current ratio was 232.3, its quick ratio was 232.3, and its cash ratio was 30.0. These ratios suggest that Unico has sufficient liquidity in the short term, but the company's long-term viability remains uncertain given the ongoing runoff of Crusader and the company's inability to generate significant revenue and cash flow.

The company's return on assets and return on equity ratios were -0.04 and -0.18, respectively, as of September 30, 2022, indicating poor profitability and a lack of efficiency in utilizing its assets and equity to generate returns.

Outlook

Unico's financial performance and liquidity position are expected to continue to be challenged as Crusader's runoff progresses. The company has not provided any specific guidance or outlook for the future, but it is clear that the company faces significant hurdles in its efforts to stabilize its operations and financial condition.

Conclusion

Unico American Corporation is a company in the midst of a challenging turnaround, as its primary insurance subsidiary, Crusader Insurance Company, has been placed into runoff. The company's financial performance has been severely impacted, with significant declines in revenue, net income, and cash flow. Unico's liquidity position and investment portfolio have also been negatively affected by Crusader's runoff, and the company's ability to pursue strategic alternatives is largely dependent on continued financial support from Crusader, which may not be forthcoming. The company's geographic concentration in California and the regulatory oversight of Crusader by the CA DOI further compound the challenges Unico faces. Investors should closely monitor the company's progress in addressing these issues and its ability to stabilize its operations and financial condition.