LONDON, April 17 (Reuters) - Munich Re has sold a $500 million catastrophe bond to protect two North Carolina underwriting associations against hurricane losses as insurers increasingly choose to cover risks with bonds rather than buying traditional reinsurance.
Insurers and reinsurers use so-called "cat bonds" to transfer major risks such as storms and earthquakes to bond market investors, freeing up their capital to underwrite new insurance business.
The cat bond sector ended 2012 with more than $6 billion in sales - the second highest in the history of the market.
Total issuance so far in 2013 stands at $1.7 billion, but brokers predict that sales could reach $7 billion by the end of the year - matching a record set in 2007.
Since the start of the year, the catastrophe bond market has offered cheaper insurance against natural disasters than the reinsurance sector. The influx of investors seeking protection from mainstream financial shocks has meant yields have fallen to an all-time low, but investors can still get higher returns from cat bonds than in the wider financial markets.
Munich Re, the world's biggest reinsurer, increased the bond offer from $200 million in the marketing phase after high demand from investors.
The cat bond, called Tar Heel Re, will protect the North Carolina Insurance Underwriting Association (NCIUA) and the North Carolina Joint Underwriting Association (NCJUA) from hurricanes in the region.
Credit rating agency Standard & Poor's assigned a B+ rating on the Series 2013-1 notes issued by the Bermuda-based special purpose vehicle - which are used by insurers to sell catastrophe bond notes.
The notes cover losses in North Carolina from named hurricanes, tropical storms, and tropical cyclones and will trigger a payout if one event or a combination of disasters over a year adds up to $100 million in insured losses, S&P said in a report.
The notes priced at 850 basis points above U.S. money market funds, which was much lower than the coupon range of 9 - 10 percent the bond was marketed at, investors say.
Tar Heel Re will cover the North Carolina association for three years, and is the fourth catastrophe bond to be sponsored by the NCJUA and NCIUA.
The new deal will replace expiring cover from another cat bond deal - another bond called Johnston Re, a $202 million cat bond programme issued by Munich Re - that will expire in May this year.
The NCJUA and the NCIUA first sponsored a cat bond in 2009 with a $200 million transaction with Swiss Re's Parkton Re vehicle.
To join the Thomson Reuters Insurance Linked Securities Community for more news and analysis, click here Reporting by Sarah Mortimer; Editing by Elaine Hardcastle