Imagine Group Holdings Ltd. will restate income statement items related to reinsurance contracts with American International Group and an affiliate company because the policies do not meet risk transfer requirements, its chief financial officer said on Tuesday.

The restatement bears on the Bermuda-based reinsurer?s 2003 financials but has ?no impact on the bottom line? or balance sheet, Imagine?s Michael Daly told The Royal Gazette.

Imagine?s restatement relates to two reinsurance contracts its wholly-owned subsidiary Pillar Insurance (Bermuda) Limited sold to AIG affiliates while Pillar in turn reinsured itself for 100 percent of the contracts? risk through a reinsurance policy with Barbados-based Union Excess Reinsurance Co. Ltd.

Imagine said it had previously applied reinsurance accounting to the AIG transactions but would re-account for them under deposit accounting rules after AIG admitted in May to effectively controlling Union Excess.Under reinsurance accounting rules a certain level of risk must be transferred through the contract or the policy must be carried as a deposit or loan. Imagine said the net insurance risk in the AIG contracts was ?insufficient to warrant reinsurance accounting?. The policies Imagine sold to AIG were worth $609 million in gross premium under the original accounting but are adjusted by $120.8 million to $489 million in the restatement.

The arrangement with Imagine likely benefited AIG in one of several ways, including the likelihood that the commercial insurance giant increased its capacity to write business through the reinsurance contracts, and could have benefited from an income boost from the business that went to Union Excess because Barbados law allows for the discounting of reserves.

?The future income of reserves was being brought back onto the bottom line,? said a reinsurance executive of the Union Excess business model. AIG said in its 10-K filing with the US Securities and Exchange Commission (SEC) that its relationship with Union Excess ?allowed AIG to absorb substantially all the economic returns?.

AIG in May reduced five years of profit by $3.9 billion on the back of an internal accounting review they conducted while under a broad investigation from US regulators, including New York Attorney General Eliot Spitzer.

Imagine was subpoenaed by the US Securities and Exchange Commission (SEC) last December in relation to its contracts with AIG, Mr. Daly confirmed this week.Imagine and its majority owner, Toronto-based asset management firm Brascan Corp, said it is co-operating with the investigation, which Mr. Spitzer is part of.

Brascan principal George Myhal told The Royal Gazette: ?We take these matters very seriously. We have formed a committee to make sure we deal appropriately and cooperate fully with the SEC investigation.?

In its 2004 financial disclosure Imagine said it was not aware of AIG?s links to Union Excess when it inked the reinsurance contracts.

Union lists its registered office as the Bridgetown, Barbados law firm Chancery Chambers. Chancery principal Dr. Trevor Carmichael has been an Imagine director, which has a principal office in Barbados, since the company was founded in 2000.

AIG effectively controlled Union Excess because most of the owners were protected under financial arrangements with Starr International Company (SICo), a powerful private company holding about 12 percent of AIG?s stock worth billions of dollars and controlled by past and present AIG management.

It is not clear how Imagine, which is not an AIG-owned company or affiliate, was able to buy retrocessional, or reinsurers? reinsurance, from Union Excess without knowing of the AIG link.

AIG?s 10-K said Union Excess, from its 1991 formation, reinsured risks emanating primarily or solely from AIG subsidiaries either directly or indirectly.

Imagine said its policy is to only buy reinsurance from companies that carry a minimum A- rating from insurance ratings agencies A.M. Best or Standard & Poor?s.

AIG spokesman Chris Winans said yesterday that Union Excess was never a rated entity. A.M. Best and S&P confirmed they have not rated the company on a financial strength or issuer credit basis.

Privately-held Imagine was set up in late 2000 as a finite risk reinsurer but has diversified into selling several types of insurance and reinsurance in the four years since, Mr. Daly said.

It continues to sell some finite risk, a non-traditional loss mitigation type of insurance that regulators have been probing for its potential to be misused to mask losses.

Imagine?s majority owner, Brascan, trades on the New York Stock Exchange and the Toronto Stock Exchange.