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Disaster investors upped bets in Q1

Kei Uesugi | Stone | Getty Images

Investors pumped $1.2 billion into catastrophe bonds in the first quarter of this year, dramatically increasing what amounts to a bet on a mild hurricane season this summer.

Verisk's Property Claim Services, in a quarterly report, said the amount issued was up 37 percent over the same period last year, making for the third-largest quarter in "cat bond" history.

Catastrophe bond investors receive interest payments in exchange for buying bonds that are sponsored by insurers and linked to specific events, such as hurricanes hitting the Gulf Coast or earthquakes striking California.

If one of those disasters does happen and the insurer's losses exceed a certain amount, the investors' principal can be wiped out. Yet the bonds are increasingly popular because they are considered "uncorrelated"—in other words, not tied to the usual forces that move financial markets, like interest rate swings and economic growth.

Five of the six bond deals completed in the first quarter were exposed in part or in their entirety to U.S. risk, predominantly hurricanes, while two have exposure to Australia or Japan.

One criticism of the cat bond market in the past has been a perceived overexposure to hurricanes, though losses in recent years have been limited.

With hurricane season starting June 1, that could be tested yet again.

PCS said the second quarter could be strong again this year for the cat bond business because of growing interest in Florida for bonds. As last year's season was especially quiet, it could lower costs for issuers even further this year, making the market more attractive.

According to the insurance capital website Artemis, the current average forecast for the 2014 Atlantic hurricane season is 12 named storms, of which five turn into hurricanes, of which two become major hurricanes (category 3 or higher).

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