Bermuda-based reinsurer Imagine Group says it did not know its own director was the president of a Barbados company it bought reinsurance from in 2003 ? a business deal that Imagine recently unwound after it came under regulatory scrutiny for not meeting risk transfer requirements.

Imagine chief financial officer Mike Daly said on Monday that the company?s due diligence on Union Excess ? a Barbados reinsurer it bought reinsurance from to protect it from potential losses on two reinsurance contracts sold to American International Group ? never uncovered the identity of Union?s president, Trevor Carmichael, who is also an Imagine director.

Dr. Carmichael, a Barbados lawyer who has served in various roles for AIG affiliates since the 1980s, was made an Imagine Insurance Limited director in late 2000 when the company formed as a finite risk reinsurer. He is president of Union as well as being its secretary and a director.

?We did due diligence on Union Excess but it did not include talking to Dr. Carmichael,? Mr. Daly said of Imagine?s decision to buy reinsurance from Union. Union?s registered address is Dr. Carmichael?s Bridgetown, Barbados law firm, Chancery Chambers.

The fact that Dr. Carmichael was an Imagine director, and had a director and management position with Union Excess, may have put him in a conflicted position once Imagine, through its Bermuda subsidiary Pillar Insurance (Bermuda) Limited, became a client of Union in 2003. Dr. Carmichael never told Imagine he was involved with Union Excess, according to Mr. Daly, who said it was understood that Dr. Carmichael was a director of many companies.

Last night Dr. Carmichael told that he was limited in what he could say on the matter because of ethical and legal obligations. He did not deny his connections to Union or Imagine.

Until recently Barbados statutory regulations required an exempt insurer to have a resident citizen on its board. Typically the lawyer who incorporated the insurer was asked to become a director. The requirement no longer stands.

Mr. Daly declined to say why Imagine would reinsure 100 percent of the risk from the AIG contracts ? which accounted for about 20 percent of its business that year ? with a little-known Barbados reinsurer that did not carry a financial strength rating, was undercapitalised and effectively only did business with one customer, AIG.

Imagine?s policy is to buy reinsurance from companies that are A- rated, or better, by insurance ratings agencies A.M. Best or Standard & Poor?s.

Mr. Daly said Imagine?s underwriting committee made an exception in the Union case. He declined to say why, or if AIG asked or suggested that Pillar, under Imagine, reinsure with Union Excess.

?I?ve talked to counsel about this, and I really don?t want to say anymore. We are a private company with an underwriting committee that approved the transaction, approved the reinsurer, and that is as far as we are willing to go,? Mr. Daly said.

AIG spokesman Chris Winans declined to comment.

In May, Imagine restated certain income statement items related to the 2003 contracts it sold to AIG. Specifically, it reaccounted for the contracts under deposit accounting rules because risk transfer was not sufficient to qualify the contracts for more favourable reinsurance accounting.

Imagine said it made the change because previously undisclosed links between AIG and Union became public. Imagine said it did not know that ?AIG in fact or effectively controlled Union Excess?.

The restatement reduced Imagine?s gross premiums in 2003 by $120.8 million. Net income was not affected.

AIG may have benefited in several ways from Imagine ceding, or reinsuring the risk in its two contracts with Union, including the ability to discount reserves, as allowed under Barbados law, and earning any profit Union made from the deal.

Imagine?s auditor, KPMG Barbados, signed off on the restatement note on May 16. AIG also in May disclosed that it would consolidate the financial dealings of Union Excess into its books.

AIG made the consolidation because a ?significant portion of the ownership interests of Union Excess shareholders are protected against loss under financial arrangements with Starr International Company,? the commercial insurance giant said in its annual filing with the US Securities and Exchange Commission on May 31. Union Excess? inclusion in AIG?s financials reduced shareholders? equity by more than $950 million at December 31, 2004.

Starr International is a powerful private company that owns about 12 percent of AIG?s stock worth $18.9 billion, at current market prices. It continues to be controlled by AIG?s ex-chief executive Maurice Greenberg, who resigned earlier this year amid a regulatory probe of AIG.

AIG has been under investigation by New York Attorney General Eliot Spitzer, the US Securities and Exchange Commission and the Department of Justice since last year for orchestrating a finite risk contract with General Re, a Berkshire Hathaway company, to mask losses, as well as for hiding dealings with offshore reinsurers, such as Union Excess.

?The investing public relied upon AIG?s reported underwriting results to its detriment and was financially damaged,? Mr. Spitzer charged in a May civil suit brought against AIG and former management.

According to the suit, Union was ?a Barbados reinsurer similar to Coral Re?.

Coral Re came under regulatory scrutiny from insurance departments in Delaware, New York and Pennsylvania in the early 1990s because AIG had purchased about $1 billion in reinsurance from a company that only had $15 million in capitalisation, according to Mr. Spitzer?s civil suit.

Dr. Carmichael?s ties to AIG go back to 1987, when the insurance giant set up Coral Re and asked him to be a director of that company.

AIG resolved the regulatory dispute by shutting down Coral Re and said it would alert regulators to any affiliated reinsurers with ?characteristics similar to Coral?.

AIG did not disclose to regulators that in 1991 it formed Union Excess, under a different name, according to Mr. Spitzer?s suit.

Union was similar to Coral, the suit said, because AIG found Union?s investors and drafted all documents related to its capitalisation, Union was undercapitalised for the amount of reinsurance it sold, it was backed by passive investors, had management and administrative functions performed by the same AIG affiliate, and Union?s officers had numerous relationships with AIG.

Bermuda-based reinsurer Richmond Reinsurance Company was said to share similar attributes to Coral Re.

Imagine was subpoenaed by the SEC last December in relation to its contracts with AIG. Mr. Spitzer is working with the SEC in the investigation. Mr. Daly said Imagine also received a federal subpoena in June from the U.S Attorney for the Southern District of New York. As with the first subpoena, the federal subpoena seeks information on non-traditional products, or finite risk insurance. A number of Bermuda and US insurers received similar federal subpoenas around the same time.

Imagine said special counsel, Weil, Gotshal and Manges LLP is assisting it in its efforts to cooperate with the investigations.

In addition to being CFO, Mr. Daly is currently Imagine?s co-chief executive after one of the company?s founders, Brad Huntington, resigned from the CEO post in recent weeks because of a contractual dispute with Imagine?s majority shareholder.

Imagine is privately held. Its largest shareholder, Toronto-based asset management company Brascan Corporation holds an 80 percent stake. Brascan trades on the Toronto and New York stock exchanges.