Billionaire John Paulson’s New York hedge fund firm has shut an operation in Bermuda that had been targeted by a Democratic lawmaker as a tax shelter.

Paulson’s venture, a reinsurer named PacRe Ltd., has stopped writing new coverage, and its insurance policies have expired, according to two people familiar with the venture who asked not to be identified discussing private contracts. The insurance company that partnered with the money manager, Validus Holdings Ltd., will provide an update on the wind-down its fourth-quarter conference call, one of the people said.

The venture has been a target of U.S. officials since 2014, when Ron Wyden, the Oregon Democrat who led the Senate Finance Committee at the time, urged the Treasury Department to crack down on PacRe and similar companies set up by hedge fund managers. He said they were exploiting a loophole that allowed “billionaires to benefit from unwarranted and massive tax breaks.” Hillary Clinton, who is seeking the Democratic nomination for president, pledged to end the Bermuda reinsurance tax advantage.

PacRe was started in 2012 with $500 million in capital, to be invested in three of Paulson’s funds, Validus said at the time. Paulson, a major donor to Republican candidates, has a net worth estimated at $9.8 billion, according to the Bloomberg Billionaires Index. While he rose to fame with successful bets against mortgage securities in the financial crisis, his subsequent results were less impressive, partly because of losses on gold.

Investment Losses

Validus said third-quarter investment results included $40.7 million in realized losses relating to PacRe. Paulson’s venture also stood out for how little insurance it sold.

“PacRe was set up in an environment when returns on high- level catastrophe risks were more attractive, and today they are not,” Ed Noonan, Validus’s chief executive officer, said in an October conference call. “Having a business with no premium coming into it isn’t a business.”

Reinsurers sell backup coverage to insurance companies, protecting them against big risks such as natural catastrophes. Paulson, David Einhorn, Dan Loeb and Steven Cohen are among hedge fund managers who have set up reinsurers in tax-friendly Bermuda or the Cayman Islands. Cohen has exited his reinsurer, and companies tied to Loeb and Einhorn are each trading below the prices from their initial public offerings.

Preferential Rate

While the ventures provide a stable pool of capital that the money managers can use to buy securities, they also offer a tax-advantaged way to invest in a U.S. hedge fund, potentially transforming any short-term capital gains generated by the fund into long-term capital gains, which are taxed at a preferential lower rate. Insurance and reinsurance companies enjoy an exception to U.S. rules meant to prevent tax avoidance through offshore investing vehicles, but the Internal Revenue Service has never clearly defined how much insurance a company must sell to qualify.

Armel Leslie, a spokesman for Paulson & Co. with Peppercomm, had no immediate comment. Validus said in a statement late Tuesday that the PacRe entity was “off risk” effective Jan. 1.

Missing Expectations

Last year, ratings firm A.M. Best withdrew its rating for PacRe, citing a request from the company. A.M. Best said that “the alternative asset strategy has not performed as expected during PacRe’s operating history, producing unrealized investment losses.” The ratings firm also noted that the reinsurance market had become more competitive as money managers piled in, pressuring underwriting margins.

PacRe had no insurance employees, instead depending on minority investor Validus to handle underwriting. Under pressure from Wyden, the IRS agreed last year to establish rules for the first time that would define which companies can qualify for the favorable tax treatment offered to insurers. In proposed rules issued in April, it said companies like PacRe that outsource their insurance underwriting wouldn’t qualify for the tax break.

–-With assistance from Katherine Chiglinsky.