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Long term care boom brings Penn Treaty to financial brink

Pennsylvania insurance regulators may be forced to step in and take control of Penn Treaty American Corp. if the Allentown insurer can't bolster its dangerously low statutory surplus account, a crisis sparked by the company's faster-than-expected growth in sales of long term care insurance policies. According to Penn Treaty, premium from the sales of long term care products increased 24 percent in 2000.

At issue is a shortfall in Penn Treaty's surplus account, the amount the state requires an insurer to set aside as a cushion against possible catastrophic events.

As Penn Treaty scrambles to avoid liquidation, it has also announced it will also stop writing new policies in Florida and Virginia. These states require higher minimum surplus levels, according to Cameron B. Waite, Penn Treaty's chief financial officer.

At issue is a shortfall in Penn Treaty's surplus account, the amount the state requires an insurer to set aside as a cushion against possible catastrophic events. Currently Penn Treaty's surplus account contains approximately $17 million. However, unless additional money is set aside, regulators say that amount is much too low.

In order to quickly raise cash, Penn Treaty has announced it will sell a subsidiary, American Independent Network Insurance Co. of New York, as well as some of its non-core businesses, to Universal American Financial Corp. of Rye Brook, N.Y., for nearly $13 million. The deal is pending approval by insurance regulators in both Pennsylvania and New York.

Additionally, the insurer is selling additional stock to shareholders at a rights offering on April 20, 2001. According to Penn Treaty, it expects the offering to generate another $40 million in operating capital and reserves.

Stock plummets, lawsuit filed

Penn Treaty issued a news release on March 30, 2001, indicating that its reserves had fallen below statutory minimums and that it faced possible liquidation. After the announcement, company stock fell from a closing price of $17.46 on March 29, 2001, to $10.17 the next day, a 42 percent decline.

Following the company's disclosure of its financial situation, Berman DeValerio & Pease filed a lawsuit in U.S. District Court in Philadelphia on April 17, 2001, on behalf of shareholder Earl R. Sullivan. The lawsuit accuses Penn Treaty of "illegally misleading" investors.

The lawsuit, which seeks class action status, asks for damages under federal securities laws for anyone who bought Penn Treaty stock between Nov. 7, 2000 and March 29, 2001. According to the lawsuit, the insurer repeatedly said increased growth was not jeopardizing the company's health and that it had adequate reserves for the increased level of business.

However, the lawsuit charges that the company continued selling policies during the fourth quarter of 2000, despite an inability to maintain adequate reserve levels, and despite the fact that the company's growth put its solvency at risk. "In effect, Penn Treaty sold itself out of existence," the lawsuit states. "Premiums grew by 22 percent during the fourth quarter of 2000. But instead of the $40 million in reserves required by regulators, the company had just $17.2 million in capital by the end of the year."

On April 19, 2001, a day before Penn Treaty's rights offering to shareholders, stock was trading at $3 per share.

Penn Treaty speaks to policyholders

Penn Treaty reassured policyholders in a press release the company issued on April 16, 2001. In that document, the insurer maintains:

  • The statutory surplus does not affect the company's ability to pay future claims.
  • The surplus issue does not affect the company's ability to continue paying current claims.
  • The need for additional capital is not the result of an unusually high level of claims, rather it is the result of the growth of the company's long term care business that "requires us to increase statutory surplus proportionately."

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