Returns on catastrophe bonds are falling as more investors enter the market and supply outstrips demand.

Aon Benfield’s index of catastrophe bond prices shows the securities fell behind comparable asset classes during the second quarter. 

The BB-rated catastrophe bond price index increased 0.32% for the quarter, compared with a rise of 1.59% on an index for three-year US corporate bonds with the same rating.

Aon’s All Bond cat bond index gained 7.74% for the year to June 30, compared with 1.75% for a 3-5-year US Treasury note, 10.11% for the three-year bond index and 22.04% for the S&P 500 stock market index.

Yields on the bonds have also fallen due to a rise in supply.

Aon Benfield’s latest insurance-linked securities update shows record bond issuance in the second quarter and a record half at $US5.9 billion ($6.27 billion), up almost 50%.

New bond issuers include one of Japan’s largest insurers, Sompo Japan Nipponkoa Insurance, plus Texas Windstorm Insurance Association and Europe’s third-largest insurer, Generali.

Aon Benfield Americas CEO Bryon Ehrhart says reinsurance sellers have been trying to stimulate more demand.

He says it will take a significant catastrophe to hit reinsurers’ capital reserves and stop bond prices falling. An insured loss of $US80-$US100 billion ($85.08-$106.35 billion) will have to occur to trigger a reinsurer capital loss of 10%.