The catastrophe bond market is strengthening despite the factSuperstorm Sandy was the third most expensive hurricane in U.S.history.

The first quarter of 2013 began with Superstorm Sandy in the“rear view mirror,” according to a report released today by AonBenfield Securities on the insurance-linked securities market.

Indeed, the market so far in this quarter is strengthening, withinvestors forced to pay premium prices for existing securities,according to Aon Benfield, which is the investment banking divisionof global reinsurance intermediary and capital advisor AonBenfield.

The Aon Benfield report cited Successor V-F4 bonds. The bond waspriced at 75 at the end of the year, 50 on Jan. 18 and ended thefirst quarter at 65 because investors remained cautious that anyfurther increase in the Property Claims Service estimate of thecurrent estimated cost of Sandy of $18.75 billion “would likelyimpact” the price of the security, Aon Benfield analysts said inthe report.

The report also says new bonds issued this year encountered amarket where there is excess capital available for investment ininsurance-linked bonds, probably because yield-hungry investors aresearching everywhere for higher returns than currently available inmost parts of the market.

The report says there is heightened demand for new issuance, andexisting bonds “saw strong mark-to-market gains throughout thefirst quarter.”

That was reflected in the fact new catastrophe bond issuance forthe period reached $670 million, with a further $1.12 billion ofbonds in the process of being marketed, according to thereport.

The Aon Benfield All Bond Index increased by 0.9 percent — asignificant increase given that U.S. hurricane seasonalitytypically reduces absolute spread levels during the first half ofthe year, the report indicates.

At the midpoint of the quarter, secondary market tradingdecreased as investors' focus shifted to the primary issuances inthe market, the report says.

As the first quarter ended, several cat bond transactions werein the marketing process, achieving similar success to those thathad closed during the period.

“Given the strong demand for ILS solutions, we expect 2013 to bean active market for both primary issuance and secondary trading,”the report says.