A.M. Best Downgrades Ratings of Penn Treaty American Corporation and Its Subsidiaries

Business Wire, Oct 3, 2008

OLDWICK, N.J. -- A.M. Best Co. has downgraded the financial strength rating (FSR) to D (Poor) from B- (Fair) and issuer credit ratings (ICR) to "c" from "bb-"of Penn Treaty American Corporation's (Penn Treaty) (Allentown, PA) [NYSE:PTA] insurance subsidiaries. Penn Treaty's insurance subsidiaries include Penn Treaty Network America Insurance Company, American Network Insurance Company (both of Allentown, PA) and American Independent Network Insurance Company of New York (New York, NY). Concurrently, A.M. Best has downgraded the ICR to "c" from "ccc" of Penn Treaty. The outlook for all ratings is negative.

These rating actions are in response to Penn Treaty's announcement that it has notified Imagine International Reinsurance Limited (Imagine) (Ireland) of its intention to recapture on January 1, 2009 all long-term care insurance policies reinsured by Imagine. In August 2008, Imagine stated it was not willing to provide additional collateral in the form of letters of credit (LOCs) associated with business issued prior to 2002 ("old co" business). Until 2008, Imagine had been providing increasing LOCs as part of the "old co" reinsurance agreement, which had enhanced Penn Treaty's statutory surplus position. As of today, Penn Treaty does not have enough statutory capital and surplus to recapture this business. Additionally, Penn Treaty's insurance entities recently have reported weakened statutory surplus due to large operating losses. This position has been further eroded by the recent failure of Washington Mutual (WaMu), which represented a sizeable portion of Penn Treaty's June 30, 2008 statutory surplus position.

While Penn Treaty recently announced plans to sell its wholly owned subsidiary, United Insurance Group Agency, Inc. (UIG), unless a major strategic capital alternative is in place prior to January 1, 2009, Penn Treaty's primary insurance subsidiary would be considered insolvent under Pennsylvania statute. Given the current turmoil in the capital markets and the extremely poor performance of its "old co" business, A.M. Best believes Penn Treaty will be extremely challenged to raise enough capital to offset the estimated over $100 million statutory surplus deficit, which will be reported in early 2009, upon recapture of the reinsurance agreements. In light of its weak capital position, Penn Treaty immediately ceased writing new business.

Penn Treaty plans to release its 2007 GAAP financials sometime over the next four to six weeks. When they are released, A.M. Best expects there will be a large loss and decline in shareholders' equity. Effective immediately, the New York Stock Exchange has suspended trading in Penn Treaty.

If Penn Treaty is not successful in finding a buyer or raising significant capital and the company voluntarily enters a rehabilitation plan, A.M. Best will downgrade the company's FSR to E (Under Regulatory Supervision).

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.