Oct. 2 (Bloomberg) -- A Pennsylvania regulator sought the liquidation of Penn Treaty Network American Insurance Co., the provider of long-term care coverage for 120,000 customers, in what may be the biggest forced breakup of an insurer in the U.S. in at least five years.

Penn Treaty and a unit “do not have the ability to pay future claims without significant rate increases,” Pennsylvania Insurance Commissioner Joel Ario said today in a statement. “In the current circumstances, those rate increases simply would not be fair to policyholders.”

The insurer is among at least seven in the U.S. facing forced rehabilitation or liquidation by regulators this year as the recession cuts into capital, according to data collected by the National Organization of Life & Health Insurance Guaranty Associations. That compares with four in 2008. California’s regulator seized Golden State Mutual Life Insurance Co. on Sept. 30 after the company was unprofitable for five straight years.

A liquidation of Allentown-based Penn Treaty, with about $1 billion in assets, would be the largest in at least five years, said Sean McKenna, the association’s spokesman, in an e-mailed statement. “Very few companies of any size have been liquidated in that period,” he said. The association’s data was based on reports from A.M. Best.

Guaranty funds are used to pay claims when regulated insurers are unable to meet obligations. Penn Treaty policies will remain active for customers who continue to pay premiums and a state fund will take effect, Ario’s office said. The funds have the right to assess other insurance companies to raise cash. A state court will weigh Ario’s request to liquidate the company, his office said in the statement.

Penn Treaty American Corp., the parent company of the insurer, fell 15 cents, or 54 percent, to 13 cents in over-the- counter trading. A request for a statement from Penn Treaty was referred to Ario’s office.

Long-term care policies provide coverage to help pay for home-health aides or residence in a nursing home or assisted- living facility. Policyholders with questions may call 1-800- 362-0700 and dial extension 3270.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.netJamie McGee in New York at jmcgee8@bloomberg.net

Last Updated: October 2, 2009 16:29 EDT