Phony Insurance
The IRS said some of the offshore arrangements were shams, either because they weren’t selling enough insurance or because the insurance they reported selling was phony. The IRS “will challenge the claimed tax treatment,” government lawyers wrote.

The IRS has rarely if ever done so. Tax lawyers and insurance executives said they were unaware of any company targeted by the IRS, even in private.

“Nobody’s been challenged, so nobody knows whether it’s ironclad or not,” said Faries, the Bermuda lawyer. The IRS declined to comment.

A year after the IRS notice, Greenlight Capital Inc.’s Einhorn started laying the groundwork for another reinsurer in a tax haven. Greenlight Capital Re Ltd., which opened in 2006 in the Cayman Islands, put 100 percent of its assets under Einhorn’s control. Einhorn, 44, whose net worth is estimated by Forbes at $1.2 billion as of last September, took the reinsurer public in 2007.

Third Point
Third Point’s Loeb, 51, was next in 2011 with Third Point Reinsurance Ltd., which raised about $785 million, including $75 million of Loeb’s own money. Forbes magazine estimated his personal fortune at $1.3 billion as of September.

And last year, SAC’s Cohen, 56, whose net worth Bloomberg estimates at about $9.5 billion, put $125 million of his own money into a $500 million reinsurance company called SAC Re.

Both Cohen and Loeb followed the Greenlight model: hire a handful of local employees to sell reinsurance while relying on the hedge fund firm to manage the assets.

A stable pool of capital to invest may be particularly welcome at SAC Capital, whose outside investors this month asked to withdraw $1.7 billion amid a U.S. government insider-trading investigation. Outside money accounts for less than half of SAC Capital’s $15 billion under management; the rest belongs to Cohen and his employees.

Cohen and SAC haven’t been accused of any wrongdoing and believe they’ve acted appropriately, a spokesman said in November. They declined to comment for this article.

Third Point Re said in a statement last year that it located in Bermuda because of the island’s “respected regulatory regime” and talented workforce. It hired John Berger, a career insurance executive, as CEO.

Tax Advantage
As for the tax benefits, Berger said in an interview, “Anybody in Bermuda has a tax advantage.”
Hedge fund-backed reinsurers turn the traditional business model on its head. Reinsurers help insurance companies cushion big risks, such as a California earthquake or a wave of lawsuits against asbestos makers.

A typical reinsurer invests its capital conservatively, in investments that are unlikely to decline in value and are available to pay claims on short notice. It might invest in Treasuries and investment-grade corporate bonds, and focus on making money through selling as much profitable coverage as possible.

By contrast, the hedge fund-backed reinsurers seek big returns from investing and more stable results from underwriting.

Fewer Policies
A.M. Best, which gauges insurers’ financial strength, has given “A-” ratings to the companies set up by Paulson, Cohen, Loeb and Einhorn with the understanding that they compensate for volatile investments by selling fewer policies than their competitors.

Paulson’s firm, Pacre, takes that approach the farthest. Pacre helps protect insurers against natural catastrophes such as Florida hurricanes. While traditional reinsurers have far more exposure, Pacre won’t risk more than $170 million, or about one-third of its capital, according to Edward Noonan, chief executive of Bermuda reinsurer Validus Holdings Ltd., which handles Pacre’s underwriting.

That loss would happen only if it had to pay out every single policy in full at the same time— in the event the end of the world happened,” Noonan said on an April conference call.

Pacre’s Capital
When it was established in April, Pacre’s startup capital included $450 million from the “principals” of Paulson’s hedge fund, according to A.M. Best. While A.M. Best didn’t name the principals, Paulson owns about 53 percent of his firm’s assets under management, according to the Bloomberg Billionaires Index, and at least 75 percent of the firm. No other officer of the firm owns even 5 percent, according to a filing with the Securities & Exchange Commission last year.

Bloomberg estimates Paulson’s net worth at $11.2 billion. He opened his money management firm in 1994, and rose to fame in 2007 after a wager against the collapsing U.S. subprime mortgage market generated billions in profits. Paulson told a Congressional hearing in 2008 that all of his personal investments were with Paulson & Co., which now manages about $18 billion in assets. He announced plans last year to donate $100 million to conserve Manhattan’s Central Park, steps from his six-story townhouse.

The other $50 million for Pacre came from Validus, to which Pacre outsources its underwriting. Validus sold premiums worth 32 percent of its equity in the most recent nine months.

Pacre invested the entire $500 million in startup capital in four Paulson & Co. hedge funds. Through December, those investments have lost about $19 million in value. Since the funds lost money, the Paulson investors wouldn’t have owed income taxes anyway.

—With assistance from Jesse Drucker in Rome, Richard Rubin in Washington, D.C., and Katherine Burton and Saijel Kishan in New York. Editors: Daniel Golden, Chris Staiti

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