NEW YORK (Bloomberg) ? MBIA Inc., the world?s largest bond insurer, said the US Securities and Exchange Commission and New York Attorney General Eliot Spitzer may sue over reinsurance policies that prompted the company to restate seven years of earnings.

MBIA is in talks with both regulators to resolve what would be civil suits, the Armonk, New York-based company said in a statement yesterday.

The insurer was subpoenaed by the SEC and Spitzer in November and has since lowered 1998 to 2004 net income by $54 million to correct accounting on policies bought to limit losses from a failed hospital network.

Spitzer and the SEC have subpoenaed more than a dozen companies about reinsurance contracts that may be abused to smooth earnings or mask losses. Unresolved probes of American International Group Inc., which also fixed reinsurance accounting, wiped out as much as $59 billion in market value and prompted the removal of Maurice (Hank) Greenberg, who had been chief executive for almost 40 years.

Shares of MBIA are down 5.7 percent since the November subpoenas and the US attorney in Manhattan began investigating after the restatement in March. Spokeswoman Liz James had no comment beyond the statement. SEC spokesman John Nester declined to comment, and Spitzer spokesman Darren Dopp didn?t return a phone call.

Reinsurers share insurers? risk of claims in exchange for premiums or fees.

State and federal prosecutors have been examining instances when insurers mask losses or inflate capital by classifying what is essentially a low-cost loan as reinsurance even though little or no risk is transferred. In some cases, insurers arrange to pay some of the claims that a reinsurer is officially supposed to shoulder in secret oral ?side agreements.?

MBIA bought the reinsurance in question after Allegheny Health, Education and Research Foundation?s Philadelphia hospitals filed for bankruptcy in July 1998.

The policies, from Converium Holding AG, reduced MBIA?s losses from guaranteeing payments on $265 million of bonds sold by the hospital operator. MBIA also bought reinsurance from Munich Re and Axa SA to limit its hospital losses. Those policies didn?t require an accounting correction.

Converium, based in Zug, Switzerland, agreed to assume about $70 million of MBIA?s losses in exchange for a commitment to share in some of its new business.

The audit committee of MBIA?s board hired a law firm and determined that there may have been an oral agreement that minimised the transfer of risk to Converium.

In a complicated chain of transactions, Converium reduced its risks assumed from MBIA by passing some of them to Paris-based Axa, MBIA said when it restated.

MBIA said Axa, in turn, appears to have obtained an oral commitment from MBIA to compensate any Converium losses above a certain level. That created a loop that brought the risk back to MBIA, according to MBIA.

MBIA was notified of the potential SEC suit in a Wells notice. Such notices indicate the securities regulator has found potential infractions and allows the recipient to respond before action is taken. The Wall Street Journal reported last week that the SEC and Spitzer may seek to close their investigations within weeks.