MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Asset-Intensive Reinsurance Financial Reinsurance Total expenses, which is comprised primarily of interest credited, policy benefits and acquisition costs increased 56.6% and 20.6% in 2003 and 2002, respectively. The increase in 2003 can be attributed to the increase in policy acquisition costs and interest credited. The higher policy acquisition costs and growth in interest credited is the result of the significant growth in this segment. The higher expenses are offset by the increase in investment income, which is reflective of the higher asset base. The growth in other expenses in 2003 reflects the underlying growth and resource  support for this sub-segment.  Asset-intensive reinsurance primarily concentrates on the investment risk within underlying annuities and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance funds withheld or modified coinsurance of non-mortality risks such that the Company recognizes profits or losses primarily from the spread between the investment earnings and the interest credited on the underlying deposit liabilities. Several of the coinsurance agreements are on a funds withheld basis. During 2003, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133 Implementation Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments” (“Issue B36”), recording a change in value of embedded derivatives of $12.9 million within revenues, net of $30.7 million of related amortization of deferred acquisition costs (see Note 2—“New Accounting Pronouncements” in Notes to Consolidated Financial Statements for further discussion). The U.S. financial reinsurance sub-segment includes results  from RGA Financial Group, a wholly-owned subsidiary, and consists primarily of net fees earned on financial reinsurance transactions. The majority of the financial reinsurance transactions assumed  by the Company are retroceded to other insurance companies. Financial reinsurance agreements represent low risk business that the Company assumes and subsequently retrocedes with a net fee earned on the transaction. The fees earned from the assumption of the financial reinsurance contracts are reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy  acquisition costs and other insurance expenses.  Income before income taxes increased in 2003 to $25.4 million compared to $14.3 million and $15.0 million in 2002 and 2001, respectively. The increase during 2003 was mainly due to a  $12.9 million benefit related to the change in fair value of embedded derivatives. The fair value is expected to fluctuate significantly on  a quarterly basis since it is primarily tied to movements in credit spreads. In addition, 2003 results were impacted by higher credit losses than expected within the funds withheld portfolios, somewhat offset by the continued growth in the asset base. These credit losses were reflected in investment income. Results during 2002 were favorably affected by the growth in the asset base compared to 2001, however, realized losses on investment securities increased $5.3 million during 2002, resulting in an overall decrease of  $0.7 million in income before income taxes. Income before income taxes increased 33.3% and 8.9% in 2003 and 2002, respectively. The increase for 2003 can be attributed to lower operating expenses allocated to this sub-segment in 2003 compared to 2002 and 2001. At December 31, 2003, 2002 and 2001, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, was $811.3 million, $872.7 million and $547.8 million, respectively. Total revenues, which are comprised primarily of investment income, increased 59.2% and 16.9% in 2003 and 2002,  respectively. The increase in 2003 can be primarily attributed  to continued growth in asset base for this segment. The average invested asset balance was $2.7 billion, $1.9 billion, and  $1.3 billion for 2003, 2002 and 2001, respectively. Invested assets outstanding as of December 31, 2003, and 2002 were  $3.1 billion and $2.4 billion, of which $2.0 billion and $1.4 billion were funds withheld at interest, respectively. THIS IS RGA. 2003 ANNUAL REPORT 27