Sept 5 (Reuters) – Sales of catastrophe bonds, which letreinsurers and insurers transfer risk to capital markets, havereached a four-year high and are expected to hit $6 billion by theend of the year, Aon Benfield said on Wednesday.

Cat bond issuance totaled nearly $6 billion in 2008 beforefalling sharply as the financial crisis struck, but the market forcat bonds has since improved as investors' memories of the crisisfaded, soothed by double-digit returns for many ILS.

New issuance and outstanding volumes of cat bonds have seen agrowth of $2 billion in the first quarter of 2012, compared withthe same period in 2011, Aon's investment banking division, AonBenfield Securities, said in a report.

A number of new companies backed by hedge funds have entered themarket in recent months, lured by the promise of higher yields inthe asset class.

Two new rated Bermuda-based reinsurers were launched in 2012 –PAC Re, and Dan Leob's Third Point Re, which formed in February2012 with $785 million in capital.

“New capital flowing into the reinsurance sector is currentlyaround $5 billion, with around $3 billion of that moving into theInsurance Linked Securities sector and the remainder into permanentcapital facilities,” Aon Benfield Securities Chief Executive PaulSchultz said.

In the current low yield environment, the higher yieldsavailable from investing in insurance risk are very attractive tocapital market investors, said Schultz, who added that he expectedannual issuance is of cat bonds to reach $6 billion.

The Aon Benfield ILS indices posted annual gains for the yearconcluding June 2012 – with the U.S. Hurricane and U.S. EarthquakeBond indices returning 7.60 percent and 4.38 percent, respectively,while the All Bond and BB rated Bond indices posted returns of 7.40percent and 7.86 percent, respectively.

Since the first cat bond in 1996, ILS have been used to transfera wide range of risks from natural catastrophes to life insurance,with the catastrophe bond market generating $44 billion ofcumulative issuance.