In early December, two insurance units of Allentown, Pa.-based Penn Treaty American Corp. that focused on long-term care (LTC) became the latest in a series of LTC insurers to declare failure. Though relatively small carriers, their liabilities were estimated to be dauntingly large.

With combined assets of some $600 million and potential LTC claims worth more than $4 billion, the liquidation scheduled for early next year (per state court records) is being called the nation’s second largest life/health insurance insolvency in history, amassing some $2.6 billion in assessments that other insurers will likely be required to shell out to cover the losses.  (The record belongs to Executive Life Insurance Co., a California-based life insurer that went belly up in the 1990s to the tune of $2.9 billion, largely due to its holdings of high-yield debt.)

“This is not a surprise at all,” says Brian Gordon, president of Riverwoods, Ill.-based MAGA, an LTC insurance broker. “We didn’t write this company very often. It was more of a substandard carrier, to us. With the unsustainably low premiums it charged and its reckless underwriting standards, there was no way it would continue to survive. A few of our clients bought it because they wanted the cheapest plan in the market, but for the most part it was not the kind of business we wanted to be involved with.”

LTC woes aren’t new, of course. The policies pay for institutional or at-home assistance with daily living tasks, going well beyond what’s supplied by major medical coverage, Medicare and Medicaid. But back in the 1990s, actuarial data was insufficient. Providers were surprised when clients began living longer and actually making claims that could go on for years. There were fewer policy lapses than originally anticipated, too. Putting further pressure on the bottom line: low interest rates.

Over the past decades, many carriers have been forced to raise rates -- when allowed by state insurance regulators -- causing a wave of negative press coverage as certain states allowed double-digit percent increases. This, in turn, led to a number of departures from the market. Today there are fewer than a dozen carriers doing significant business in standalone LTC insurance policies.

“The news [about Penn Treaty American] is likely to startle those who own LTC policies,” says Lewis Walker, president of Walker Capital Management, an asset manager and advisor in Peachtree Corners, Ga. “However, traditional LTC sales have been declining for some time due to premium increases. Also, a number of key players have stopped writing LTC policies.”

So Walker, like Gordon, isn’t particularly phased. He acknowledges that he wasn’t familiar with Penn Treaty per se.

“The numbers do sound large, but I never recommended that company and would not peg it as a major player like Genworth or John Hancock.”

According to published reports, the two Penn Treaty units represent nearly 80,000 LTC policyholders. A drop in the bucket, some say, compared to the more than 7 million LTC policyholders nationwide.

According to reports, Pennsylvania regulators have sought to liquidate the two carriers since 2009. It’s been in the courts ever since.

Clients interested in LTC coverage need not panic. Many are finding better value in LTC coverage that’s linked to life insurance products -- the so-called hybrid policies. “Men in particular figure that if they don't use the LTC benefits, at least benefits could flow to the spouse, children, or other loved ones” through the life insurance component, says Walker.

Even those who held LTC policies through Penn Treaty might come out okay. “As I understand it, they are paying out their claims, taking care of their clients. They’re not walking away from anybody right now,” says Gordon.

Looking ahead, he’s encouraged by signs of a strengthening industry. “Most companies still surviving today are underwriting their policies much better than before, with more realistic and conservative assumptions, and stable pricing,” says Gordon.