Munich Re has sold a $500 million catastrophe bond to protecttwo North Carolina underwriting associations against hurricanelosses as insurers increasingly choose to cover risks with bondsrather than buying traditional reinsurance.

Insurers and reinsurers use so-called “cat bonds” to transfermajor risks such as storms and earthquakes to bond marketinvestors, freeing up their capital to underwrite new insurancebusiness.

The cat bond sector ended 2012 with more than $6 billion insales – the second highest in the history of the market.

Total issuance so far in 2013 stands at $1.7 billion, butbrokers predict that sales could reach $7 billion by the end of theyear – matching a record set in 2007.

Since the start of the year, the catastrophe bond market hasoffered cheaper insurance against natural disasters than thereinsurance sector. The influx of investors seeking protection frommainstream financial shocks has meant yields have fallen to anall-time low, but investors can still get higher returns from catbonds than in the wider financial markets.

Munich Re, the world's biggest reinsurer, increased the bondoffer from $200 million in the marketing phase after high demandfrom investors.

The cat bond, called Tar Heel Re, will protect the NorthCarolina Insurance Underwriting Association (NCIUA) and theNorthCarolina Joint Underwriting Association (NCJUA) from hurricanes inthe region.

Credit rating agency Standard & Poor's assigned a B+ ratingon the Series 2013-1 notes issued by the Bermuda-based specialpurpose vehicle – which are used by insurers to sell catastrophebond notes.

The notes cover losses in North Carolina from named hurricanes,tropical storms, and tropical cyclones and will trigger a payout ifone event or a combination of disasters over a year adds up to $100million in insured losses, S&P said in a report.

The notes priced at 850 basis points above U.S. money marketfunds, which was much lower than the coupon range of 9 – 10 percentthe bond was marketed at, investors say.

Tar Heel Re will cover the North Carolina association for threeyears, and is the fourth catastrophe bond to be sponsored by theNCJUA and NCIUA.

The new deal will replace expiring cover from another cat bonddeal – another bond called Johnston Re, a $202 million cat bondprogramme issued by Munich Re – that will expire in May thisyear.

The NCJUA and the NCIUA first sponsored a cat bond in 2009 witha $200 million transaction with Swiss Re's Parkton Re vehicle.