(Bloomberg) ? Bonds of Aon Corp., Marsh & McLennan Cos. and other insurance companies and brokers led gains in investment-grade bonds in 2005 as the firms resolved allegations of taking kickbacks from insurers.

Insurance debt returned 4.23 percent this year, including reinvested interest, followed by a 3.9 percent advance for energy bonds, both double the average for investment-grade securities. Debt of Aon, based in Chicago, returned 16.2 percent on average, the most among its peers, according to Merrill Lynch & Co. data through last week.

Insurer bonds, the second-weakest group in the last quarter of 2004, rebounded after Marsh & McLennan settled a lawsuit from New York Attorney General Eliot Spitzer in January. Spitzer sued the company for allegedly steering clients to insurers that paid hidden fees. Aon, the largest broker after Marsh, reached a settlement in March.

?It?s a recovery story,? said John Weaver, a fund manager at McGlinn Capital Management in Wyomissing, Pennsylvania, where he oversees $800 million of bonds. ?2005 is the year when people are saying they may be out of the woods.?

Overall investment-grade bonds returned 1.96 percent, down from 5.42 percent in 2004 and the worst performance since falling 1.89 percent in 1999. High-yield, high-risk, or junk, bonds delivered a 2.72 percent return, down from 10.9 percent last year and the worst since dropping 1.89 percent in 2002. New York-based Marsh & McLennan?s 5.875 percent debt due in 2033 gained an industry-best 4.4 percent this month.

The extra yield investors demanded to own investment-grade corporate bonds rather than Treasuries widened 16 basis points to an average 99 basis points this year, according to Merrill Lynch. A basis point is 0.01 percentage point. Investors demand higher yields on corporate debt relative to Treasuries because of the risk companies will miss payments.

Aon and Marsh are among brokers that agreed to stop taking fees from insurers in October 2004 after Spitzer called them kickbacks. The companies neither admitted nor denied wrongdoing. Marsh spokeswoman Barbara Perlmutter and Aon spokesman Al Orendorff didn?t return phone calls seeking comment. Twenty-eight insurance issuers may get ratings increases in 2006, second only to the banking industry with 38 candidates, according to Standard & Poor?s. Companies include Aon, rated BBB+, and New York Life Insurance Co., rated AA+. Aerospace and defence also are candidates for upgrades, according to S&P.

Insurance bonds also benefited after hurricane losses were less than initially speculated and on optimism insurance rates may increase, some investors said. ?The property and casualty business tends to get better when you have catastrophes and God knows we?ve had enough catastrophes this year,? said Ben Matthews, who helps oversee about $8.7 billion in fixed income for John Hancock Asset Management in Boston.

Hurricanes Katrina, Rita and Wilma may cost insurers $57.6 billion, more than double the annual record for US natural disasters, according to Advisen Ltd., a New York-based consulting firm. Storm modeler Risk Management Services Inc. predicted as much as $79 billion in losses.

?They?ve been able to pass on some price increases, and that will help profits,? said James Hannan, who oversees $3 billion in fixed income at MTB Investment Advisors in Baltimore. ?That improves your balance sheet and will lead to better credit spreads.?

Hannan, who doesn?t hold insurance bonds, owns debt of Valero Energy Corp., the largest US oil refiner, and Devon Energy Corp., he said.

Colonial Pipeline Co., the largest operator of petroleum- product pipelines, returned eight percent on average to lead energy bonds returns this year. Debt of New York-based Amerada Hess Corp. recorded 7.8 percent returns this year. Colonial Pipeline is located in Alpharetta, Georgia.