MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the fair value of the embedded derivatives totaled $42.7 million and was included in the funds withheld at interest line item on the consolidated balance sheet. Subsequent to adoption, the change in the market value of the underlying is recorded in the consolidated statement of income as change in value of embedded derivatives, net of related amortization of deferred acquisition costs. Industry standards and practices continue to evolve related to valuing these types of embedded derivative features. Significant adverse performance or losses on these treaties may result in a loss associated with the embedded derivative. In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” which requires the consolidation by a business enterprise of  variable interest entities if the business enterprise is the primary beneficiary. FIN 46 was effective January 31, 2003, for the Company with respect to interests in variable interest entities obtained after that date. With respect to interests in variable  interest entities existing prior to February 1, 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), which extends the effective date of FIN 46 to the period ending May 31, 2004. The Company currently does not believe it will be required  to consolidate any material interests in variable interest entities. In addition to its annuity contracts, the Company has entered  into various financial reinsurance treaties on a funds withheld  and modified coinsurance basis. These treaties do not transfer  significant insurance risk and are recorded on a deposit method  of accounting with the Company earning a net fee. As a result of the experience refund and loss carry forward provisions contained  in these treaties, the value of the embedded derivatives in these  contracts is currently considered immaterial. The Company  monitors the performance of these treaties on a quarterly basis. Effective January 1, 2003, the Company adopted the provisions  of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” FASB Interpretation No. 46, “Consolidation  of Variable Interest Entities,” and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The adoption of these provisions did not materially affect the Company’s financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123.” Effective January 1, 2003, the Company prospectively adopted the fair value-based employee stock-based compensation expense recognition provisions of SFAS No. 123, as amended by SFAS No. 148. The Company formerly applied the intrinsic value-based expense provisions set forth in APB Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”). For the year ended December 31, 2003, the Company recorded pre-tax compensation expense of approximately $1.6 million associated with stock option grants issued during January 2003.  THIS IS RGA. 2003 ANNUAL REPORT 46