Penn Treaty American Corp. says it has resolved a dispute with Imagine International Reinsurance Ltd. over backing of long term care insurance policies issued by Penn Treaty subsidiaries.

Under the agreement, Penn Treaty, Allentown, Pa., will not pay expense and risk charges to Imagine, Hamilton, Bermuda, beyond the first quarter of 2008 for the primary Imagine reinsurance contract or beyond the second quarter of 2008 for the secondary contract.

Penn Treaty otherwise would have had to pay expense and risk charges through the end of the year on the primary treaty and possibly until Sept. 30, 2010, on the secondary treaty, Penn Treaty says.

Penn Treaty estimates the value of the waived charges to be about $14.5 million.

In exchange, the company has withdrawn efforts to seek arbitration over Imagine’s refusal to back Penn Treaty subsidiary LTC insurance policies with about $112 million in letters of credit.

Sometime around Jan. 1, 2009, Penn Treaty will take back policies that Imagine would have reinsured under the terms of both agreements, Penn Treaty says.

If Pennsylvania insurance regulators approve the deal, a final settlement agreement will be executed by Friday, Penn Treaty says.

Penn Treaty announced in August that Imagine had withdrawn its offer to back older LTC insurance policies sold by Penn Treaty Network America Insurance Company and American Network Insurance Company.

In October, Penn Treaty said Penn Treaty Network America Insurance Company, its primary insurance subsidiary, would become insolvent unless the subsidiary could find new financing to replace the reinsurance agreements that Imagine had ended.

Imagine reinsured most Penn Treaty LTC insurance policies issued before 2002. The policies provided about $200 million in annual premium revenue and covered more than 100,000 policyholders nationwide, Penn Treaty said.

Imagine declined to continue backing the older policies because Penn Treaty failed to win approvals from some state regulators for rate increases on the policies, Penn Treaty said.

In other news, Penn Treaty says it has completed the sale of United Insurance Group Agency Inc., Milford, Mich., an agency unit, to LTC Global Inc., Medford, Ore., for $14.25 million.

The deal payment includes $1 million in cash and a promissory note for $10.25 million, Penn Treaty says.

In addition to the net purchase price, Penn Treaty will retain about $3 million in cash and cash equivalents that United Insurance held at the end of the third quarter.

Penn Treaty says it has received about $4.5 million in dividends and tax provisions from United Insurance this year.

On Sept.30, United Insurance had a book value of about $5.5 million, excluding the cash and cash equivalents being retained by Penn Treaty.

Penn Treaty says it will record a gain, net of taxes, of about $8.5 million on the agency sale.