MBIA, the world's biggest bond insurer, is stepping up its campaign against what it sees as an unfair tax advantage for its Bermuda-based rivals.

In a letter to shareholders this week, MBIA's new chief executive officer Joseph (Jay) Brown suggested that if the US tax code is not modified to get rid of the offending loophole, the company would have to move — to Bermuda.

Mr. Brown also said MBIA would earmark $1 million to contribute to the Coalition for a Domestic Insurance Industry, an industry group which shares the company's views.

In his letter to shareholders, Mr. Brown said MBIA would escalate its efforts to "campaign vigorously against the ability of US financial guarantors to reinsure US domestic financial guarantee transactions with foreign affiliates without paying US corporate tax rates". This was needed, he added, to "level the playing field in terms of the cost of capital".

"As more money comes into existing and new competitors' public finance business, the discrepancy this loophole allows becomes even more pronounced," Mr. Brown wrote.

"In a competitive and open market to provide all American public entities with access to the capital markets, it makes no sense to allow foreign competitors with US domiciled operations to operate without paying their fair share of US taxes.

"After nine years of trying to use mainly logic to make this argument to those who can affect this change, we have decided to enlist help and thus will earmark a minimum of $1 million this year to support the Coalition for a Domestic Insurance Industry. We are prepared to pay more if that proves insufficient!

"I've been against this loophole for years, and discussed it in my first investor conference in 1999. I still don't look good in Bermuda shorts but we will eventually have to move the company if the US tax code is not modified."

Last week, MBIA pulled out of the Association of Financial Guaranty Insurers (AFGI), saying it disagreed with the industry body on several key points, including the taxation issue.

MBIA's stance will pit it against bond insurer rivals based in Bermuda, including Assured Guaranty, which benefits from the US taxation status quo. Assured has so far come through the sub-prime mortgage crisis with its three AAA credit ratings intact, unlike many rivals, and has consequently massively increased its share of the municipal bond guaranty market over the past three months.

Bond insurers provide financial guaranties on municipal bonds, taken out by local authorities to finance major projects such as the building of schools and hospitals. Many have encountered difficulties after venturing outside their traditional business to insure more complex investment structures exposed to US sub-prime mortgages. A wave of mortgage delinquencies in the US has reduced the value of these structured investment vehicles (SIVs), sparking losses and credit rating downgrades among bond insurers.

MBIA is one of those under pressure but its shares have recovered well this week after credit rating agency Standard & Poor's said the company was no longer under review for a downgrade from its all-important AAA insurance credit rating.

MBIA already takes advantage of Bermuda's low-tax environment through its stake in two Island companies that reinsure some of its business, Channel Re and Ram Holdings.

Channel Re, whose sole client is MBIA, was downgraded three notches by Moody's last week, from Aaa to Aa3. Moody's expected the reinsurer to lose $230 million on its policies, compared to its claims-paying ability of $930 million.