MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments. segment grows, although the other operating expenses increase, the substantial growth in premium volume covers these costs, creating favorable economies of scale. Other revenue during 2003 and 2002 primarily represented profit and fees associated with financial reinsurance in Taiwan and  South Korea. These financial reinsurance treaties are in run-off and no new treaties were added in 2003, causing the decline in other revenue. Fees paid to retrocessionaires that were included in policy acquisition costs and other insurance expenses partially offset the fees earned for these years. Asia Pacific net premiums grew 61.7% during 2003 and 33.8%  in 2002. The growth was primarily the result of new business from existing treaties and from new treaties, combined with favorable exchange rates. Several foreign currencies, particularly the Australian dollar, the New Zealand dollar and the Japanese yen strengthened against the U.S. dollar in 2003. The effect of the strengthening of the local currencies was an increase in 2003 premiums by  $27.3 million over 2002, and $8.6 million for 2002 over 2001, caused mostly by the Australian/New Zealand operations.  Claims and other policy benefits as a percentage of net premiums increased in 2003 and totaled 71.6%, 69.2% and 63.2% for 2003, 2002 and 2001, respectively. This percentage will fluctuate due to timing of client company reporting, variations in the mixture of business being reinsured and the relative maturity of the business. In addition to the change in mix of business, a portion of the increase in this percentage for 2003 over 2002 was attributable to the unfavorable performance of one treaty. Death claims are reasonably predictable over a period of many years, but are less predictable over shorter periods and are subject to significant fluctuation. The premium growth in 2003 was primarily in the Australia/New Zealand, Japan, and South Korea regions. The growth in Australia/ New Zealand was split evenly between premiums with new clients, additional premium from existing clients, and the effect of exchange rates. In local currency, the Australia/New Zealand  business increased by approximately 55.9%, while in U.S. dollars the premiums grew approximately 84.6%. Given the more mature nature of the Australian and New Zealand insurance markets, it  is unlikely that future growth rates will continue at these rates, although additional growth is anticipated. The growth in the Japanese market was attributable to having a full year of a large treaty, versus a partial year in 2002, and additional business with most existing clients. The creation of the Japanese branch in December 2003 helps strengthen the Company’s presence in the Japanese market and is expected to lead to future growth. The growth in South Korean premiums in 2003 was attributable to  new business from an existing treaty and from a new large critical illness treaty. Substantial growth in this region is anticipated going forward, although this growth is off a small base of business. Premiums from the Hong Kong and Taiwan regions were essentially flat for the year, with growth from new treaties offset by the run-off of a large closed block. A portion of the growth of premiums for the segment is due to reinsurance of accelerated critical illness. This coverage provides a benefit in the event of a death from or the  diagnosis of a defined critical illness. Premiums earned from this coverage totaled $31.2 million, $15.0 million and $13.7 million  in 2003, 2002 and 2001, respectively. Premium levels are  significantly influenced by large transactions and reporting  practices of ceding companies and therefore can fluctuate from period to period. Other operating expenses increased 14.8% during 2003 and 32.9% for 2002. The increase in expenses is attributable to exchange rates, additional expenses in the Sydney regional office  to support the business in the regions, expansion of the Japanese office to meet the requirements of branch status, and a full year  of the South Korean office as opposed to a start-up operation in 2002. As a percentage of premiums, other operating expenses  fell to 6.5% in 2003 from 9.2% in 2002 and 9.3% in 2001, respectively. The Company believes that sustained growth in  premiums should lessen the burden of start-up expenses and expansion costs over time. Policy acquisition costs and other insurance expenses as a percentage of net premiums represented 18.3%, 22.9% and 30.2% for 2003, 2002, and 2001, respectively. As the segment grows, renewal  premiums, which generally have lower acquisition costs than first year premiums, account for a greater percentage of the total  premiums. Accordingly, the ratio of acquisition costs to premiums should decline over time. The percentages also fluctuate due to timing of client company reporting and variations in the mixture of business being reinsured. Policy acquisition costs are capitalized and charged to expense in proportion to premium revenue recognized.  Net investment income increased $3.6 million or 51.5% in 2003, and increased $3.1 million or 79.4% in 2002. The increase in 2003 was primarily due to growth in the investment assets in Australia and a favorable exchange rate, along with an increase  in allocated investment income. Investment income and realized investment gains and losses are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support the segment business volumes. 31 THIS IS RGA. 2003 ANNUAL REPORT