Long term care insurer Penn Treaty American Corp. says it has suspended sales of new policies and voluntarily agreed to submit a rehabilitation plan to the Pennsylvania Insurance Department Jan. 1, 2009.
If Penn Treaty, Allentown, Pa., cannot find a buyer or secure substantial financing, its auditors may declare the company is no longer a going concern, the company says.
Penn Treaty says its primary insurance subsidiary will become insolvent under the plan unless new financing is found to replace reinsurance agreements that were recently terminated.
The company says its subsidiaries have notified their primary reinsurer, Imagine International Reinsurance Ltd., that they intend to take back all policies reinsured under several agreements Jan. 1.
The company says its surplus has been enhanced by about $145 million as a result of the reinsurance agreements. In taking back the reinsured policies, Penn Treaty’s primary insurance subsidiary would be considered insolvent under Pennsylvania statute, unless the company can find another strategy for maintaining an adequate surplus by Jan. 1, the company says.
Penn Treaty’s primary reinsurance agreement with Imagine reinsures “substantially all” long term care insurance policies issued before 2002 on a 100% coinsurance basis. The company can recapture the reinsured policies only on Jan. 1 of any year, subject to 90 days’ advance notice.
Penn Treaty’s annual cost for the reinsurance has been about $14 million to $15 million. Beginning in 2009, this cost is estimated to be about $22 million to $33 million due to penalty clauses in the agreement, Penn Treaty says.
Penn Treaty estimates that the increased costs would delay its ability to recapture the reinsured policies by at least 10 years. Its additional costs over those 10 years would exceed $200 million, for which the company’s policyholders would receive about $100 million of additional claim protection.
The company says in its announcement that it is “continuing the review of strategic alternatives.”
Penn Treaty American announced in August that Imagine, Bermuda, had withdrawn its offer to back older LTC insurance policies sold by 2 Penn Treaty subsidiaries, Penn Treaty Network America Insurance Company and American Network Insurance Company.
Penn Treaty told Imagine that it considered the reinsurer to be in breach of contract for failing to continue to underwrite the policies under a reinsurance agreement completed in 2005.
On June 30, 2005, Imagine agreed to reinsure all in-force LTC policies Penn Treaty issued before Jan. 1, 2002.
Under a second agreement in December of that year, Imagine promised to reinsure 75% of new LTC policies issued by the 2 subsidiaries.