Penn Treaty American Corp. says a reinsurer has withdrawn its offer to back older long term care insurance policies sold by two Penn Treaty subsidiaries.

Imagine International Reinsurance Ltd., Bermuda, says it will not provide any additional letters of credit to back a block of LTC business written before Jan. 1, 2002, by the subsidiaries, Penn Treaty Network America Insurance Company and American Network Insurance Company, Penn Treaty announced today.

Penn Treaty notified Imagine that it considers Imagine to be in breach of contract for failing to continue to underwrite the policies with letters of credit, as agreed under a reinsurance agreement in 2005.

Imagine says it declined to continue backing the older policies because Penn Treaty has failed to secure approvals for rate increases on the policies from some state regulators, according to Penn Treaty.

“Penn Treaty vehemently disagrees that state insurance regulatory actions or inactions support this position,” Penn Treaty says.

Cameron Waite, executive vice president of strategic operations for Penn Treaty, insists his company has historically received state approvals for all its rate increase requests.

In 2005, Penn Treaty entered into 2 agreements with Imagine to reinsure its LTC business.

Under one agreement, effective June 30, 2005, Imagine would reinsure all in-force LTC policies Penn Treaty issued before Jan. 1, 2002.

Under the second agreement, signed in December 2005, Imagine promised to reinsure 75% of new LTC policies issued by the two subsidiaries. That agreement is not affected by the current dispute, Penn Treaty says.

Imagine reinsures substantially all Penn Treaty’s LTC policies issued before 2002, providing about $200 million in annual premium and covering over $100,000 policyholders nationwide, Penn Treaty says.

That provision is the only item in dispute, notes Waite. “Imagine has honored all other aspects of the agreement,” he says. “We expect that to continue.”

In its announcement, Penn Treaty says it will pursue legal remedies for its dispute, including possible arbitration, if the reinsurer fails to respond within 5 business days of the Aug. 21 announcement.

Penn Treaty says it also is working with the Pennsylvania Department of Insurance to urge Imagine to honor the agreement. Pennsylvania insurance officials declined to comment on the dispute.

A representatives for Imagine also declined to comment on the dispute.