Hurricane Sandy may have devastated the Jersey shore, but it didn’t dampen investor interest in high-yielding catastrophe bonds. The market for natural disaster “cat bonds,” which property and casualty insurers issue to transfer risk, just had its best year for new issuance since 2007 thanks to a strong fourth quarter, though some older bonds with exposure to Sandy may end up getting nicked for some of their principal.

The first deal after Sandy, from insurer USAA in November, covers a range of U.S. perils, including hurricanes, severe thunderstorms, earthquakes, winter storms and California wildfires. The company increased the offering from $250 million to $400 million in response to demand from investors. It was able to do so even though Standard & Poor’s Corp. had put two of the earlier bonds in USAA’s “Residential Reinsurance” series, from 2011 and earlier in 2012, on CreditWatch with negative implications because of potential losses from Sandy.

“The successful Residential Re 2012-2 placement post-Sandy was a very good sign,” says William Dubinsky, the head of insurance-linked securities at Willis Capital Markets & Advisory, the investment banking arm of the global insurance broker. That kind of deal, with those kinds of risks, is “the bread and butter” of the natural disaster catastrophe bond market, he says.

Last year companies issued a total of $5.9 billion in bonds in the natural disaster category, bringing the total amount of outstanding natural disaster cat bonds to $15.2 billion globally. Overall, cat bond issuance, including a much smaller market segment devoted to pandemic and mortality risk, was slightly more than $6 billion.

Last year’s natural disaster bond issuance was up by 37.2 percent from 2011’s $4.3 billion. Dubinsky says 2013 should be even stronger. “The pipeline that we’re aware of is pretty good,” he says.

Still, the size of the cat bond market remains small. Outstanding debt totals $36 billion once private placements are included, with the U.S. accounting for over a third of that. That’s roughly equal to the amount of reinsurance premiums taken in by just one company, market leader Munich Re, in 2011.

Then again, the market for cat bonds is relatively new. The first natural catastrophe bond was issued in 1996. In the wake of Hurricane Andrew in 1992 and the Northridge earthquake in Los Angeles in 1994, insurers started thinking about new ways of raising additional capital to cover truly extraordinary losses.