NEW YORK (Bloomberg) — Meteorologists' predictions for an above-average number of storms aren't denting investor optimism in insurers as the US hurricane season starts.The perceived risk of owning bonds of Allstate Corp. and American International Group Inc. is hovering near five-year lows after clear skies contributed to record 2006 profits, according to credit-default swap traders. Shares of Bermuda-based XL Capital Ltd. led a 12-percent advance by the 10-member Standard & Poor's 500 Property & Casualty Insurance Index in the past 12 months.

"When you have a year like last year, with so little activity, you end up better positioned to take whatever comes your way," said Eli Rabinowich, an analyst who helps manage $26.7 billion at New York-based Pzena Investment Management and added to its shareholdings of Allstate and XL earlier this year. "The industry as a whole is better capitalised."

The National Oceanic and Atmospheric Administration predicts three to five major hurricanes will form in the Atlantic during the next six months, compared with two in a typical year and seven in 2005. When Katrina and three others made landfall in the US that year, insurers and reinsurers paid $57.9 billion in claims, more than double the previous annual record.

Katrina ravaged parts of Mississippi, Louisiana, and Alabama in August 2005, wiping out thousands of homes and killing more than 1,500 people. After $5.67 billion of storm costs that year, Allstate, the second-largest home insurer, retreated from coastal areas, raised rates and tripled its reinsurance budget. The Northbrook, Illinois-based company said its losses would be limited to $2.17 billion if the ferocity of those storms is repeated.

Forecasts for an above-average season began in December, with researchers at Colorado State University predicting that three hurricanes would have winds of at least 111 mph, making them major storms. By April, they were projecting five.

Washington-based NOAA's National Hurricane Centre, which released its forecast May 22, made similar dire warnings last year when it predicted four to six major storms. Only two occurred, and neither made landfall in the US, contributing to record profit for insurers including Allstate, New York-based AIG and XL.

"Insurers are a good place to be, especially because we're at the start of hurricane season," said Charles Lieberman, who oversees $300 million at Paramus, New Jersey-based Advisors Capital Management LLC and increased his holdings of AIG and Bermuda-based PartnerRe Ltd. stock this year. "Investors already know they can get hit by a big hurricane, but if losses aren't so bad, everyone will jump in at the end of the season."

Last year's clear skies led to $31.2 billion of underwriting profit at US property and casualty insurers, compared with a $5.6 billion loss in 2005, according to records compiled by Insurance Services Office Inc. in Jersey City, New Jersey. Insurers' policyholder surplus, or their assets minus liabilities, jumped $61.3 billion, or 14 percent, to $487.1 billion in 2006.

"Coming into this year, insurers' balance sheets are in better shape to deal with hurricane losses," said Jian Chen, an analyst at New York-based BlueMountain Capital Management, a $3.6 billion hedge fund that reduced its purchases of credit- default swaps for insurers in the past year. "Insurers are scaling back their exposure to hurricane-prone areas."

Allstate's credit-default swaps have outperformed the benchmark CDX North America Investment Grade Index of 125 companies, which fell to $34,750 from $42,500 over the past year, according to Credit Suisse Group.

Credit swaps were conceived to protect bondholders against default and pay the buyer face value in exchange for the notes should the company fail to meet its obligations on time. A decrease in the five-year contracts indicates improvement in the perception of credit quality.

Credit-default swaps based on $10 million of Allstate's bonds fell to $12,800 from $25,750 in the past 12 months, according to London-based CMA Datavision. That's near their lowest since at least February 2002, according to Credit Suisse Group.

They trade as if Moody's Investors Service rated the company Aa3, one level above their actual A1 rating, according to Moody's credit strategy group. A year ago, they traded as if they were rated A3, two levels below their actual rating.

The extra yield investors demanded to own Allstate's $800 million of 5.55 percent bonds due in 2035, rather than Treasuries of a similar maturity, narrowed 10 basis points to 113 basis points, while the average U.S. corporate bond spread widened 2 basis points to 94, according to data compiled by Merrill Lynch & Co. A basis point is 0.01 percentage point.

"Allstate has radically changed its philosophy," said Richard Sbaschnig, an analyst at Oppenheimer & Co. in New York who has a "neutral" rating on Allstate's stock. "They're in an infinitely better position than just a couple years ago."

Sbaschnig said the formation of a hurricane may present a buying opportunity for the company's shares should uncertainty about the storm's direction and size trigger a dip in their price. They've increased 12 percent in the past year. State Farm Mutual Automobile Insurance Co., the country's largest home insurer, has no publicly traded securities.

Shares of AIG, the world's largest insurer by market value, rose 19 percent in the past year. The extra yield investors demanded on AIG's $946 million of 4.25 percent bonds due in 2013 narrowed 6 basis points to 70 basis points, according to Merrill data. Its credit-default swaps fell to $11,000 from $18,250.

AIG's biggest US commercial property insurance unit began raising rates after Katrina, and policies renewed in the fourth quarter charged an average 40 percent more than the year before. The company has also been limiting coverage for hurricane-prone policyholders to $25 million. Last year, it reported a 34 percent increase in net income to $14.1 billion.

XL credit-default swaps dropped to $30,800 from $46,750 in the past 12 months. They trade as if Moody's rated the company Baa1, one level below their A3 rating. A year ago, they traded as if they were rated Baa2, two levels below their actual rating.

The extra yield investors demanded on XL's $600 million of 5.25 percent bonds due in 2014 narrowed 28 basis points to 94, according to Merrill data.

XL, a commercial insurer and reinsurer, reduced its potential losses from offshore rigs and platforms in the Gulf of Mexico by more than 50 percent after Katrina. The company's shares rose 29 percent in the past year.

"Investors are comfortable that these companies can handle a number of losses," said Ira Jersey, a New York-based debt strategist at Credit Suisse Group.

Shares of Warren Buffett's Berkshire Hathaway Inc., which owns the third-biggest reinsurance business, gained 19 percent in the past year, while credit-default swaps declined to $7,000 from $17,750. The extra yield investors demanded on Berkshire's $1 billion in 4.85 percent bonds due in 2015 narrowed 7 basis points to 64.