HARTFORD, Conn. (Bloomberg)—Hartford Financial Services Group Inc., the insurer that repaid a U.S. bailout last year, is adding to the protection it receives through catastrophe bonds as investors seek to buy securities with higher returns.

The latest bond, sold Feb. 15, provides $135 million of coverage and pays 5 percentage points more than three-month Treasury bills, according to data compiled by Bloomberg. It matures in 2015 and protects against U.S. hurricanes for Hartford, which is based in the Connecticut city of the same name.

The insurer issued a separate $180 million catastrophe bond last year, also to protect against U.S. hurricanes.

Institutional investors are buying catastrophe bonds from insurers including American International Group Inc. and Allianz S.E. to get higher yields than on corporate bonds. Corporate debt investors demand 96 basis points more than Treasuries with similar maturities for notes due in one to three years. A basis point is 0.01 percentage point.

“We'll continue to see more pension funds come into the space,” said Paul Schultz, president of Aon Benfield Securities, an investment banking division of Aon Corp., in an interview last month. “The risk profile and the return profile fit very well.”

The Swiss Re Cat Bond Price Return Index gained about 1.8% in the past 12 months as the strongest hurricanes in the Atlantic season missed the United States. The figures don't reflect interest rates, which are higher than benchmark yields because investors risk losing their principal in the event of a disaster that meets predefined conditions.

AIG, Flagstone

Standard & Poor’s Corp. gave a BB+ rating to the bond, issued by Foundation Re III Ltd., a special-purpose company in the Cayman Islands. The rating is one level below investment grade. David Snowden, a spokesman for Hartford, declined to comment.

Swiss Reinsurance Co. Ltd., Flagstone Reinsurance Holdings S.A. and American International Group Inc. property/casualty unit Chartis Inc. were among sellers of about $4.8 billion in catastrophe bonds last year, an increase of about 40% from the full-year 2009 total, according to a report from Aon on Jan. 14. Aon forecasts new issuance of between $5 billion and $6 billion for 2011, as almost $4 billion of bonds mature.

Insurers use catastrophe bonds as an alternative to reinsurance to guard against the hurricanes, earthquakes and other natural disasters. Global prices for reinsurance were set to decline 7.5% for policies being renewed as of Jan. 1, the reinsurance brokerage of Marsh & McLennan Cos. Inc. said in December. Rates fell 6% in the year-earlier period.

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