Management's discussion and analysis
Reinsurance
St. Paul Re
Our Reinsurance segment underwrites reinsurance for leading property-liability insurance companies worldwide. St. Paul Re writes traditional treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of coverage and also underwrites finite risk reinsurance, which provides coverage at lower margins than traditional reinsurance in return for a lower possibility of loss. Our Reinsurance segment, through Discover Re Managers, Inc., also underwrites primary insurance and reinsurance and provides related insurance products and services to self-insured companies and insurance pools, in addition to ceding to and reinsuring captive insurers. The merger of USF&G's reinsurance operations (F&G Re) with those of The St. Paul in 1998 created the 14th-largest property-liability reinsurer in the world, based on combined 1997 written premiums.
Premiums - Written premiums of $1.06 billion for the year were down 12% from premium volume of $1.20 billion in 1997. The decline reflects a continuing worldwide erosion of rates for reinsurance products, and increasing capacity within the industry and from new product offerings in the capital markets. Our property reinsurance premiums declined sharply in 1998, reflecting a reduction in our exposures due to inadequate pricing on both new and renewal business. International and marine premiums were also down in 1998 as a result of soft pricing conditions and a decrease in demand for reinsurance coverages in those markets. Discover Re's written premiums of $39 million in 1998 were down $6 million from its 1997 total.
Underwriting Result - Despite the large decline in premium volume, our Reinsurance segment recorded a profitable combined ratio of 98.7 in 1998, slightly better than the 1997 ratio of 99.0. Catastrophe losses totaled $86 million in 1998, resulting largely from Hurricane Georges. Catastrophes in 1997 were just $3 million. The deterioration in catastrophe experience was offset in 1998 by favorable loss development on prior years' business. The underwriting divisions of St. Paul Re and F&G Re were substantially integrated in 1998.
1997 vs. 1996 - In 1997, written premiums declined 7% from 1996, reflecting severe pricing competition in global markets. The magnitude of premium declines in 1997 was partially mitigated by growth in Discover Re's captive business and changes in its reinsurance program which resulted in an increase in net written premiums. We also capitalized on several new business opportunities which partially offset the impact of soft market conditions on 1997 premium volume. The 99.0 combined ratio in 1997 was level with 1996. Catastrophe losses were not a major factor in Reinsurance segment results in 1997 or 1996.
Outlook for 1999 - We anticipate that current market conditions will persist in 1999, with continued deterioration in pricing levels. We are undertaking new initiatives designed to capture more business and become a preferred reinsurer in our traditional coverages, while continuing to exercise underwriting discipline in our risk selection. We will seek to take advantage of the opportunities created by the merger by developing new customized products to meet our customers' increasingly sophisticated reinsurance needs. We anticipate expanding our involvement with securitized reinsurance vehicles to provide us with additional reinsurance capacity.
