* Catastrophe bond issuance seen rising to $7 bln in 2013
* Matches 2007 record; last year saw second highest issuance
* Yields squeezed higher by short supply, investor demand
By Sarah Mortimer
LONDON, Jan 31 (Reuters) - The catastrophe bond market could see $7 billion of net new issuance in 2013, matching a record set in 2007, as issuers tap a cheaper alternative to reinsurance, U.S. reinsurance broker Willis Capital Markets & Advisory (WCMA) said in a report.
In the event of a natural disaster, insurers use the principal from so-called "cat bonds" to absorb losses. Investors use the bonds to diversify from other assets that have proved extra volatile since the 2008 financial crisis.
Last year saw $5.9 billion of net new issuance, a 37 percent increase over 2011 and the second highest ever, the report from WCMA, Willis's capital markets division said.
Sales of new cat bonds were nearly $6 billion in 2008 before the financial crisis led to defaults and curtailed activity.
But yields of between 5-7 percent for many cat bonds compared with benchmark U.S. yields of just under 2 percent.
"(Investors) were disappointed to have fewer (cat) bonds than necessary to meet their cash inflows," said Bill Dubinsky, head of WCMA's Insurance Linked Securities.
"We believe investors will anxiously welcome the new issuances that are in the pipeline," he said.
The world's No. 2 reinsurer Swiss Re also said it expected increased interest in cat bonds.
Since January 2011, the Swiss Re Total Return Index recorded weekly volatility level of 4.4 percent compared to 5.9 percent for the Barclays Ba U.S. High Yield Index and 7.1 percent for the S&P 500 Total Return index.
To see the full reports from Willis and Swiss Re, see the Thomson Reuters Insurance Linked Securities Community