Regulators and lawmakers have been discussing for years the possibility of limiting the insurance exemption. The focus intensified in 2015 with the IRS proposal and a bill from Wyden that would deny companies the beneficial treatment if insurance liabilities are less than 10% of assets. Loeb's company said in the Feb. 26 document that it believes its reserves are consistent with industry standards, but that it can't be sure that the IRS will agree that it qualifies for the exemption.

Greenlight Capital Re Ltd., which counts Einhorn as chairman, said in its annual filing that a new classification could affect the taxation of some investors.

'Adverse effect'

"If regulations are adopted or legislation enacted that cause us to fail to meet the requirements of theinsurance company exception, such failure could have a material adverse effect" on taxation of U.S. shareholders, the company said in the Feb. 22 document. "In that event, we may undertake changes to the manner in which we conduct our business." That passage is similar to language used by Cayman Islands-based Greenlight Re in a quarterly filing last year.

Wyden, the top Democrat on the Senate Finance Committee, proposed legislation in June. Under the Oregon lawmaker's plan, the status of firms with a ratio of liabilities to assets between 10% and 25% would be based on "facts and circumstances." Third Point Re had a ratio of 11.9% at the end of 2012, according to a 2014 report by the Joint Committee on Taxation on Bermuda-based insurers.

Paulson's exit

Hedge fund manager John Paulson's PacRe Ltd. has shut down and returned capital to investors, according to a January statement from Validus Holdings Ltd., the billionaire's insurance partner. PacRe devoted a much smaller share of its capital to insurance contracts than the Einhorn or Loeb ventures do.

Also, the IRS proposal targets companies that borrow their insurance executives from another firm, as PacRe did with Validus. Both Greenlight Re and Third Point Re have their own underwriters and have added insurance professionals.

Hillary Clinton, who is seeking the Democratic nomination for president, has pledged to fight the Bermuda reinsurance tax advantage. While Wyden has long been pushing for tighter rules on hedge fund reinsurers, the issue has drawn less attention from Republicans, who hold the Senate majority.

–With assistance from Selina Wang and Lily Katz.

Join us on Facebook and give us a Like!