Penn Treaty Sets Up Restructuring Plan; NYSE to Delist Company Oct. 6

ALLENTOWN, Pa., Oct 03, 2008 (A. M. Best via COMTEX) -- PTA | Quote | Chart | News | PowerRating -- Long-term-care insurer Penn Treaty American Corp. has set up a restructuring plan for subsidiaries that includes voluntarily agreeing to enter into a rehabilitation plan with the Pennsylvania Insurance Department on Jan. 1, 2009. It will immediately suspend issuing new policies pending the outcome of the restructuring.

The New York Stock Exchange suspended trading of the company's shares and will delist the company's common stock effective. Oct. 6.

Under the plan, Penn Treaty said it notified its primary reinsurer, Imagine International Reinsurance Ltd., that it intends to recapture all long-term care insurance policies reinsured by Imagine on Jan. 1. Its statutory surplus is boosted by about $145 million because of these reinsurance agreements, the company said.

The Allentown, Pa.-based Penn Treaty (NYSE: PTA | Quote | Chart | News | PowerRating) said its main insurance subsidiary would be insolvent under Pennsylvania statute if it doesn't come up with a "strategic alternative" that provides for adequate surplus before Jan. 1. Its subsidiaries include Penn Treaty Network America Insurance Co., American Network Insurance Co. and American Independent Network Insurance Company of New York.

The company intends to recapture the policies because its annual cost for reinsuring them has ranged from $14 million to $15 million. Starting in 2009, the annual cost is estimated to rise to $22 million to $33 million due to penalty clauses in the agreement, Penn Treaty said. The higher costs, it said, would delay its ability to recapture the reinsured policies by at least 10 years.

The primary reinsurance agreement with Imagine reinsures substantially all long-term care insurance policies issued before 2002 on a 100% coinsurance basis, Penn Treaty said.

In December, Penn Treaty said it retained Friedman, Billings, Ramsey & Co. to help its board of directors review strategic alternatives such as the sale of certain assets, strategic partnerships or business combinations (BestWire, Dec. 31, 2007). Soon after, it said it had to restate its year-end 2005 financial statements because of the impact of "certain errors" on previously reported quarterly results (BestWire, Jan. 11, 2008).

The company requested initial letters of interest from prospective investors or buyers by the middle of this month. If an offer provides for adequate statutory surplus, Penn Treaty said it hopes to receive a binding agreement before Jan. 1. If it doesn't receive one by that time, it said it asked the insurance department to place its insurance subsidiaries under voluntary rehabilitation.

During the rest of this year and throughout any voluntary rehabilitation, Penn Treaty said it will continue to service and renew all existing long-term care policies in force. Regarding its delisting from the NYSE, Penn Treaty said it will make other arrangements for the trading of its stock when it can.

According to the company, back in August, Imagine disputed its security requirements under the primary reinsurance agreement, forcing Penn Treaty to demand arbitration. That demand remains and Penn Treaty said it reserved its right to pursue damages against the reinsurer.

Before its dispute with Imagine, Penn Treaty said it was negotiating with the reinsurer to modify future fees and recapture provisions of the agreements. When it claimed breach of the primary agreement, Imagine stopped all modification considerations, making the agreement's projected financial viability "substantially detrimental" its shareholders and policyholders, according to Penn Treaty.

Penn Treaty's insurance subsidiaries currently have Best's Financial Strength Ratings of D (Poor).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

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