MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS defenses upon which to contest claims arising from these coverages, including defenses based upon the failure of the ceding company to disclose the existence of manufactured claims spirals, inappropriate or unauthorized underwriting procedures, etc. As a result, there have been a significant number of claims for rescission, arbitration, and litigation among a number of the parties involved in these  various coverages. This has had the effect of significantly slowing the reporting of claims between parties, as the various outcomes of a series of arbitrations and similar actions affect the extent to which higher level reinsurers and retrocessionaires may ultimately have exposure to claims. made in the Company’s consolidated financial statements, would not have a material adverse effect on its consolidated financial position.  While RGA did not underwrite workers’ compensation carve-out business directly, it did offer certain indirect high-level common account coverages to other reinsurers and retrocessionaires. To date, no such direct material exposures have been identified. If any direct material exposure is identified at some point in the future, based upon the experience of others involved in these markets,  any exposures will potentially be subject to claims for rescission,  arbitration, or litigation. Thus, resolution of any disputes will likely take several years. The calculation of the claim reserve liability for the entire portfolio of accident and health business requires management to make  estimates and assumptions that affect the reported claim reserve levels. The reserve balance as of December 31, 2003 and 2002 was $54.5 million and $50.9 million, respectively. Management must make estimates and assumptions based on historical loss experience, changes in the nature of the business, anticipated  outcomes of claim disputes and claims for rescission, anticipated outcomes of arbitrations, and projected future premium run-off, all of which may affect the level of the claim reserve liability. Due to the significant uncertainty associated with the run-off of this busi- ness, net income in future periods could be affected positively or negatively. The consolidated statements of income for all periods presented reflect this line of business as a discontinued operation. Revenues associated with discontinued operations, which are not reported on a gross basis in the Company’s consolidated statements of income, totaled $4.8 million, $3.3 million, and $3.0 million for 2003, 2002, and 2001, respectively. While it is not feasible to predict the ultimate outcome of pending arbitrations and litigation involving LMX reinsurance programs, any indirect workers’ compensation carve-out exposure, other accident and health risks, or provide reasonable ranges of potential losses, it is the opinion of management, after consultation with counsel, that their outcomes, after consideration of the provisions made in the Company’s consolidated financial statements, would not have a material adverse effect on its consolidated financial position. The Company is currently a party to various litigation and  arbitrations that involve medical reinsurance arrangements,  personal accident business, and aviation bodily injury carve-out business. As of January 31, 2004, the ceding companies involved in these disputes have raised claims, or established reserves that may result in claims, that are $62.6 million in excess of the amounts held in reserve by the Company. The Company generally has little information regarding any reserves established by the  ceding companies, and it is possible that any such reserves could be increased in the future. The Company believes it has substantial defenses upon which to contest these claims, including but not limited to misrepresentation and breach of contract by direct and indirect ceding companies. In addition, the Company is in the process of auditing ceding companies which have indicated that they anticipate asserting claims in the future against the Company that are $12.5 million in excess of the amounts held in reserve by the Company. Depending upon the audit findings in these cases, they could result in litigation or arbitrations in the future. While it  is not feasible to predict or determine the ultimate outcome of the pending litigation or arbitrations or provide reasonable ranges of potential losses, it is the opinion of management, after consultation with counsel, that their outcomes, after consideration of the provisions Deferred acquisition costs related to interest-sensitive life and investment-type contracts are amortized over the lives of the con- tracts, in relation to the present value of estimated gross profits (EGP) from mortality, investment income, and expense margins. The EGP for asset-intensive products include the following compo- nents: (1) estimates of fees charged to policyholders to cover  mortality, surrenders and maintenance costs; (2) expected interest rate spreads between income earned and amounts credited to  policyholder accounts; and (3) estimated costs of administration. EGP is also reduced by our estimate of future losses due to defaults in fixed maturity securities. Deferred policy acquisition costs (“DAC”) are sensitive to changes in assumptions regarding these EGP components, and any change in such an assumption could have an impact on our profitability. DEFERRED ACQUISITION COSTS 34 THIS IS RGA. 2003 ANNUAL REPORT