(Reuters) — Allstate, the largest publicly traded U.S home and auto insurer, has returned to the catastrophe bond market with a $250 million offering, five years after investors lost millions of dollars on a previous issue due to the collapse of Lehman Brothers.

The 2007 Willow Re bond — also for $250 million — was one of four cat bonds that used Lehman Brothers as a swap counterparty, which meant it acted as a guarantor for the collateral backing the deal.

When Lehman failed in 2008, the notes became invalid and investors did not get their original investment back.

Insurers have used catastrophe bonds since the 1990s to manage their exposure to natural disasters by transferring potential losses to investment funds. Investors receive a high rate of interest on the bonds, but risk losing part or all of their capital if a natural disaster occurs.

Allstate's next bond — Willow Re 2008, issued before the 2007 transaction defaulted — matured in June 2011, and since then the insurer has had no coverage in the cat bond market.

The new deal is called Sanders Re Ltd. and has been given a BB+ and BB rating for its Class A and B notes respectively by credit rating agency Standard & Poor's.

The series 2013-1 class A notes are looking to raise at least $100 million from investors for coverage against hurricanes and earthquakes in the United States and the Class B notes are seeking to obtain $150 million.

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This time, Allstate has assigned the collateral for the deal into U.S. money market funds, which are rated 'AAA' by S&P — the favored way for issuers since the demise of Lehman Brothers exposed weaknesses in cat bond collateral structures.

Since the start of 2013, the cat bond market has offered cheaper insurance against natural disasters compared with the traditional reinsurance market.

An influx of investors seeking alternatives to volatile mainstream financial markets has driven cat bond yields to an all-time low, but investors can still get higher returns from them than elsewhere.

Six cat bonds have closed in 2013, totaling $1.79 billion, with a further three bonds (including Sanders Re) being marketed to investors.

Brokers and cat bond experts predict sales could reach $7 billion by the end of the year — matching a record set in 2007 before the financial crisis hit.