Penn Treaty Reports Dispute with Reinsurer

    ALLENTOWN, Pa., Aug. 21 /EMWNews/ -- Penn Treaty American

Corporation (NYSE: PTA) today announced that its subsidiaries, Penn Treaty

Network America Insurance Company and American Network Insurance Company,

have provided notification of breach to Imagine International Reinsurance

Limited ("Imagine") for Imagine's failure to provide the requisite level of

collateral in the form of letters of credit pursuant to Imagine's

obligations under its reinsurance agreement. The notification of breach

applies to the Company's reinsurance agreement with Imagine for business

issued prior to 2002. The Company does not consider Imagine to be in breach

for its obligations under its reinsurance agreements for newly issued

policies.



    The Company took this action based on verbal notification provided by

Imagine that the additional letter of credit would not be provided. Imagine

has further provided written confirmation contending that they are not in

breach, stating that since "Penn Treaty has failed to obtain an Obligatory

Premium Rate Increase as the result of regulatory action or inaction, a

Regulatory Risk Event has occurred under the Agreement." Penn Treaty

vehemently disagrees that state insurance regulatory actions or inactions

support this position. Penn Treaty's notification of breach provides

Imagine five calendar days to cure prior to the Company pursuing further

legal remedies including, but not limited to, the arbitration provisions

included in the reinsurance agreement.



    The Company expects the dispute with Imagine to be resolved favorably

through the arbitration provisions of the reinsurance agreement. The

Company does not anticipate any material impact to its statutory capital

and surplus as full credit for the agreement remains in place during the

pendency of the arbitration proceedings. However, the Company cannot

guarantee the outcome of the arbitration. An unfavorable outcome could have

a materially adverse financial impact upon the Company, including a

determination that a Regulatory Risk Event has occurred pursuant to the

provisions of the reinsurance agreement resulting in a reduction in the

provided letters of credit, or any actions taken by state insurance

regulators as a result.



    Are Policyholders Protected?



    Policyholders remain protected by Penn Treaty and are unaffected by the

current actions of its reinsurer in this matter. Penn Treaty has over $1

billion in established reserves, which it believes are sufficient for the

payment of future policyholder claims. The reinsurance agreement provides

supplemental protection to the Company for policyholder claims, which is

still in effect despite the current dispute.



    Why Are Letters of Credit Needed?



    State accounting practices require certain reinsurers to provide

collateral to an insurance company in the event that the reinsurer would

default on its future obligation to pay claims under the reinsurance

agreement. Irrevocable letters of credit are one means of providing that

collateral, which is necessary to take accounting credit for the

reinsurance coverage. Penn Treaty has over $1 billion dollars in

collateral, with over $100 million currently provided by Imagine in the

form of letters of credit. However, under the terms of the reinsurance

agreement, Penn Treaty believes that Imagine is responsible to provide more

than it currently has.



    The Company expects the dispute with Imagine to be resolved favorably

through the arbitration provisions of the reinsurance agreement. The

Company does not anticipate any material impact to its statutory capital

and surplus as full credit for the agreement remains in place during the

pendency of the arbitration proceedings. However, the Company cannot

guarantee the outcome of the arbitration. An unfavorable outcome could have

a materially adverse financial impact upon the Company, including any

actions taken by state insurance regulators as a result.



    Are State Regulators Involved in this Dispute?



    Penn Treaty and its domestic state regulator, the Pennsylvania

Insurance Department, have worked together extensively to urge Imagine to

honor the terms of the agreement. Penn Treaty continues to work with the

Pennsylvania Insurance Department to ensure full compliance with all

statutes and regulations during this dispute.



    Company management intends to host a conference call for investors and

analysts on Thursday, August 28, 2008 as additional information becomes

available.



    Certain statements made by the Company in this press release may be

considered forward-looking within the meaning of the Private Securities

Litigation Reform Act of 1995. Although the Company believes that its

expectations are based upon reasonable assumptions within the bounds of its

knowledge of its business and operations, there can be no assurance that

actual results will not differ materially from its expectations including,

but not limited to, Imagine's provision of the requested letter of credit,

the outcome of the arbitration or any other legal remedies pursued, the

financial stability of Penn Treaty including any negative impact from the

results of arbitration, the Company's reserve and collateral adequacy for

future policyholder claims, the materially adverse effect of any reaction

of insurance rating agencies and state insurance departments to the

purported breach, and the continued compliance with state statutes and

regulations. For additional information and risks related to the Company,

please refer to its reports filed with the Securities and Exchange

Commission.