NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Funds withheld at interest comprised approximately 30.6% and 29.7% of the Company’s investments as of December 31, 2003 and 2002, respectively. For agreements written on a modified  coinsurance basis and certain agreements written on a coinsurance funds withheld basis, assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding company and are reflected as funds withheld at interest on RGA’s consolidated balance sheet. In the event of a ceding company’s insolvency, RGA would need to assert a claim on the assets supporting its reserve NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS liabilities. However, the risk of loss to RGA is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances with amounts owed to RGA from the ceding company. Interest accrues to these assets at rates defined by the treaty  terms. In most cases, the Company is subject to the investment performance on the funds withheld assets, although it does not control them. To mitigate this risk, the Company helps set the investment guidelines followed by the ceding company and  monitors compliance. The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2003 and 2002. SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties (in thousands): Publicly traded fixed maturity securities are valued based upon quoted market prices. Private placement securities are valued based on the credit quality and duration of marketable securities deemed comparable by the Company’s investment advisor, which may be of another issuer. The fair value of mortgage loans on  real estate is estimated using discounted cash flows. Policy loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves. The carrying value of funds withheld at interest approximates fair value  except where the funds withheld are specifically identified in the agreement. The carrying value of short-term investments at December 31, 2003 and 2002 approximates fair value. Common and preferred equity investments and derivative financial instruments included in other invested assets are reflected at fair value on the consolidated balance sheet, while limited partnership interests are carried at cost. THIS IS RGA. 2003 ANNUAL REPORT 2003 2002 Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value Assets: Fixed maturity securities $4,575,735 $4,575,735 $3,502,703 $3,502,703 Mortgage loans on real estate 479,312 499,102 227,492 248,483 Policy loans 902,857 902,857 841,120 841,120 Funds withheld at interest 2,717,278 2,799,062 1,975,071 2,031,044 Short-term investments 28,917 28,917 4,269 4,269 Other invested assets 179,320 174,646 99,540 95,043 Liabilities: Interest-sensitive contract liabilities $4,170,591 $3,900,244 $3,413,462 $3,223,005 Long-term debt 398,146 421,735 327,787 347,179 Company-obligated mandatorily redeemable preferred securities 158,292 194,490 158,176 177,401 The fair value of the Company’s interest-sensitive contract liabilities is based on the cash surrender value of the liabilities, adjusted for recapture fees. The fair value of the Company’s long-term debt and the company-obligated mandatorily redeemable preferred securities are estimated based on either quoted market prices or quoted  market prices for the debt of corporations with similar credit quality. 63