NEW YORK (Bloomberg) — Catastrophe bonds, the investments that pay out as long as there are no major hurricanes or earthquakes, are staging a comeback after last year's financial collapse brought the market to a halt.

Chubb Corp. and Assurant Inc. are among insurers that struck deals to sell more than $1.2 billion of cat bonds this year, compared with none in the last three months of 2008 after the failure of Lehman Brothers Holdings Inc. Investors will earn as much as 17 percentage points above benchmark rates for taking the risk that a disaster could cost them their principal, according to Bloomberg data.

"There's been a substantial amount of new issuance," said Judy Klugman, a New York-based managing director at Swiss Reinsurance Co. "Our pipeline is pretty robust."

The market is recovering after money from cat bonds was invested in asset-backed securities and Lehman couldn't meet its commitments to compensate for losses on the holdings. At the same time last year, hedge funds facing a liquidity squeeze had to sell assets, and investors who normally buy new cat bonds were able to spend their funds in the secondary market instead.

"If a firm needed to raise cash quickly - because they were getting margin calls from their brokers or they were getting their lines pulled - the assets that held the value the best were cat bonds," said Klugman.

Katrina, IkeInsurers use cat bonds to protect against some of the largest or least likely losses, including an earthquake in the US Midwest or a Japanese typhoon.

The National Oceanic and Atmospheric Administration last week predicted the hurricane season, beginning June 1, will be "near-normal", with four to seven storms forming in the Atlantic.Three of the four most expensive hurricanes in US history struck in the past five years.

Katrina in 2005 cost the industry about $41.1 billion, according to Insurance Services Office Inc. Wilma in 2005 and Ike last year each cost more than $10 billion.

US insurers are entering the season with less financial strength than a year earlier. Policyholder surplus - a cushion against claims that's monitored by regulators and ratings firms - declined 12 percent last year to $455.6 billion as carriers accumulated investment losses, according to the Property Casualty Insurers Association of America.

Swiss Re, which is both a buyer and issuer of cat bonds and helped create the market for the securities, traded about $350 million in the secondary market in October last year, compared with $40 million in the same month a year earlier, Klugman said.

Now, secondary trading has slowed and insurers are finding buyers for new bonds. New York-based Assurant said this month it agreed to a $150 million cat bond deal - its first foray into the market - to protect against hurricanes for three years.

Chubb, Swiss Re, Allianz SE, USAA, Liberty Mutual Group Inc. and Scor SE are returning to the market with new cat bonds this year, bringing the industry total to more than $1.2 billion, according to data from insurance broker Marsh & McLennan Cos.

More are in the pipeline, said Klugman. Carriers are paying rates as much as 50 percent higher than a year earlier, as yields also rose on corporate debt.

The increase has kept some insurance companies, called sponsors, on the sidelines. Hannover Re, Germany's second-biggest reinsurer, said in March that it didn't renew its $200 million in cat bonds that expired in December because of the rising cost of issuing the securities.

"We had a short list of folks that were poised and ready to go, and when the first couple of deals priced they said 'that's just a little too far beyond the range'," said Chi Hum, the global head of securities for GC Securities, a unit of Marsh & McLennan.

"Investors have enjoyed the huge premium, but also realise they need to temper their return expectations if they want sponsors to issue."

The bonds can replace traditional reinsurance, which is purchased by insurers to protect against large losses and is typically cheaper. Firms including Warren Buffett's Berkshire Hathaway Inc. have said they are scaling back on the catastrophic property reinsurance they sell amid investment losses.

Insurance broker Aon Corp. estimated in April that reinsurer capital declined by 14 percent in 2008.

"We have plenty of capital but we don't have as much excess capital as we had a couple years ago, so we cut back somewhat on the insurance risk," Buffett said at a press conference this month.

Companies issue cat bonds to lock in a price for multiple years of protection rather than renegotiate reinsurance contracts annually. The securities provide a dedicated fund after a catastrophic event large enough to hobble a reinsurance firm with obligations to multiple clients.

"The trade-off really is, the cat bond has security," said Shivan Subramaniam, the chief executive officer of commercial insurer FM Global.

"The money is there if something happens."

Subramaniam said his firm hadn't decided whether it will renew a three-year bond to protect against earthquakes in the US Northwest when it expires in July.

The security of cat bonds, promoted as uncorrelated with stock and real estate markets, was called into question when Lehman collapsed. The firm was among the investment banks paid by insurers to guarantee a portion of the return in funds set aside to pay the winning side on the cat bond bets.

Investors in bonds issued on behalf of Allstate Corp. haven't gotten full payment because of Lehman's failure.

The investment bank was supposed to make up the difference if securities in trusts performed worse than expected.Standard & Poor's last year lowered ratings on four cat bonds, including one protecting Allstate, because of ties to Lehman.

Competing banks, which made good on their obligations, also invested in 'atrocious' securities, said Bryon Ehrhart, head of Aon Re Global Services.

"People had generally believed that the collateral in the trusts would be more responsibly managed than what Lehman had done, and to some of our clients' surprise, other firms in the market were doing the same thing," Ehrhart said. "We've tightened up the contracts to make sure people can't do irresponsible things."