Authorities are investigating whether US bond insurer MBIA Inc. had a secret agreement with another reinsurance company beyond the one that triggered its recently announced earnings restatement, according to a source. MBIA says it had no such agreement.

The ‘secret' agreement reportedly in question was written by financial guaranty reinsurer Channel Re, a Bermuda-based joint venture. Two of the four companies behind Channel Re are well-established Island reinsurers. Ownership is divided Bermuda's RenRe (32.7 percent), Koch Financial (29.9 percent), Bermuda's Partner Re (20 percent) and MBIA (17.4 percent). The quartet set up the company in 2004.

The developments at MBIA signal an expanding inquiry into a huge but obscure sector of the insurance industry: reinsurers based in lightly regulated tax havens, including Bermuda and Barbados.

The business of another Bermuda-based company, Inter-Ocean, has also raised questions from leading ratings agency Standard& Poors (S&P).

At MBIA, investigators are trying to determine if the company, the biggest bond insurer in the US, secretly promised Channel Re that it would protect it from any losses as a result of claims it had transferred to the offshore company, said a source. If so, MBIA could have used the transaction to burnish its books by making its potential liabilities look smaller, and possibly misleading investors.

Authorities had been investigating a transaction with French insurer, AXA, that MBIA recently said may have included a secret pact.

MBIA disclosed last week that it had received fresh subpoenas from the Securities and Exchange Commission and the New York Attorney General's office about, among other things, its dealings with Channel Re. The disclosure didn't reveal what investigators are asking about.

The New York Attorney General's office and the SEC, the New York State Insurance Department are also participating in the reinsurance-sector probes.

One big question is whether the reinsurance companies accepted a real risk in doing business with MBIA, or if the transactions were more akin to low-risk loans. Another question is whether MBIA owned or controlled its reinsurers. If it did, it essentially was insuring itself - and shouldn't have been using the transactions to move liabilities off its books.

MBIA executives say the company's reinsurance agreements with Channel Re transferred enough risk to qualify as reinsurance and that MBIA doesn't control the offshore firm.

“We have significant influence, but we do not control them,” said Nicholas Ferreri, chief financial officer at MBIA. MBIA appoints two of Channel Re's 12 board members, while a third, Channel Re Chief Executive Michael Maguire, is a former MBIA executive.

MBIA said it has no agreement with Channel Re protecting the reinsurer from major losses.

The new focus comes as investigators, investors and analysts are scouring the books of MBIA and other insurers in search of transactions with offshore reinsurers that might be worthy of scrutiny, especially reinsurers owned by insurance companies with which they do business.

S&P said Bermuda Inter-Ocean Holdings Ltd. is one such closely held company that it has researched. The reinsurance company has about a dozen owners, primarily large insurers and reinsurers.

In some instances, Inter-Ocean Reinsurance acted as a “pass through,” with potential claims sent from one of its insurance-company owners to Inter-Ocean and then back to a different unit of the same insurer, said Mark Puccia, S&P global chief quality officer for insurance ratings.

“There may or may not be economic risk transfer to justify the use of favourable insurance accounting,” Mr. Puccia said. S&P stopped rating Inter-Ocean in December at the company's request, while the company was under review for a possible downgrade. An Inter-Ocean executive and a spokeswoman declined to comment.

Under insurance accounting, a company can use insurance proceeds to offset underwriting losses, making them shrink on financial statements. But that isn't the case with loans, which must be listed less attractively, as debt.

One Inter-Ocean deal already has caused problems for one of its owners: Bermuda-based RenaissanceRe. In February, RenaissanceRe, which has reported owning ten percent of Inter-Ocean, said it would restate more than three years of net income by millions of dollars. In its 2004 annual report, filed with the SEC last week, RenRe said it had recorded two transactions with Inter-Ocean as reinsurance that didn't qualify for insurance accounting. A spokesman for RenaissanceRe declined to comment.

The epicentre of the regulatory probes has been American International Group Inc., which disclosed last week a range of improper and possibly improper accounting manoeuvres, including with Bermuda-based company Richmond Insurance Company.

MBIA's Mr. Ferreri said the company believes its ties to Channel Re are being scrutinised simply because the arrangement raises questions similar to those at issue at AIG.