(Bloomberg) — Dan Loeb's reinsurer cited risks tied toregulation as the Internal Revenue Service and U.S. Senator Ron Wyden work to limit what the lawmakercalled a "tax loophole" used by hedge fund managers to routeinvestments abroad.

Third Point Reinsurance Ltd. joins a venture withties to David Einhorn inaddressing the effects of possible tax changes. Legislators areweighing limits on rules that allow hedge fund managers to paylower rates on trading profits and postpone some bills when theiroperations are classified as insurers in offshore locations. TheIRS in April proposed rules that could limitthe insurance company exemption, while notoffering specifics about which firms would be excluded.

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"It is unclear whether final regulations will include a specificmethodology and how any such methodology would apply to us," ThirdPoint Re said in its annual filing to the Securities and ExchangeCommission, in a passage about possible risks. Loeb managesinvestments for the Bermuda-based reinsurer.

Regulators and lawmakers have been discussing for years thepossibility of limiting the insurance exemption. The focusintensified in 2015 with the IRS proposal and a bill from Wydenthat would deny companies the beneficial treatmentif insurance liabilities are less than 10% ofassets. Loeb's company said in the Feb. 26 document that itbelieves its reserves are consistent with industry standards, butthat it can't be sure that the IRS will agree that it qualifies forthe exemption.

Greenlight Capital Re Ltd., which countsEinhorn as chairman, said in its annual filing that a newclassification could affect the taxation of some investors.

'Adverse effect'

"If regulations are adopted or legislation enacted that cause usto fail to meet the requirements of theinsurance companyexception, such failure could have a material adverse effect" ontaxation of U.S. shareholders, the company said in the Feb. 22document. "In that event, we may undertake changes to the manner inwhich we conduct our business." That passage is similar to languageused by Cayman Islands-based Greenlight Re in a quarterly filinglast year.

Wyden, the top Democrat on the Senate FinanceCommittee, proposed legislation in June. Under the Oregonlawmaker's plan, the status of firms with a ratio of liabilities toassets between 10% and 25% would be based on "facts andcircumstances." Third Point Re had a ratio of 11.9% at the end of2012, according to a 2014 report by the Joint Committee on Taxationon Bermuda-based insurers.

Paulson's exit

Hedge fund manager John Paulson's PacRe Ltd. has shut down andreturned capital to investors, according to a January statementfrom Validus Holdings Ltd., thebillionaire's insurance partner. PacRe devoted amuch smaller share of its capitalto insurance contracts than the Einhorn or Loebventures do.

Also, the IRS proposal targets companies that borrowtheir insurance executives from another firm, asPacRe did with Validus. Both Greenlight Re and Third Point Re havetheir own underwriters and haveadded insurance professionals.

Hillary Clinton, who is seeking the Democratic nomination forpresident, has pledged to fight the Bermuda reinsurance taxadvantage. While Wyden has long been pushing for tighter rules onhedge fund reinsurers, the issue has drawn less attention fromRepublicans, who hold the Senate majority.

–With assistance from Selina Wang and Lily Katz.

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