MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The initial adoption of EITF 03-1 did not  have a material impact on the Company’s consolidated  financial statements. In December, 2003, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 132,  Employers’ Disclosures about Pensions and Other Post Retirement Benefits—an Amendment  of FASB Statements No. 87, 88 and 106 (“SFAS 132(r)”). SFAS 132(r) retains most of the disclosure requirements of SFAS 132 and requires additional disclosure about assets, obligations, cash flows and net periodic cost of defined benefit pension plans and other defined post retirement plans. SFAS 132(r) is primarily  effective for fiscal years ending after December 15, 2003; however, certain disclosures about foreign plans and estimated future benefit payments are effective for fiscal years ending after June 15, 2004. The Company’s adoption of SFAS 132(r) on December 31, 2003 did not have a significant impact on its consolidated financial  statements since it only revises disclosure requirements. In July 2003, the Accounting Standards Executive Committee issued Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional  Long-Duration Contracts and for Separate Accounts.” SOP 03-1 provides guidance on separate account presentation and valuation, the accounting for sales inducements and the classification and  valuation of long-duration contract liabilities. SOP 03-1 is effective for fiscal years beginning after December 15, 2003. The Company estimates the impact of SOP 03-1 will be less than a $1.0 million increase to future policy benefits. In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)  No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures  certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circum- stances). Many of those instruments were previously classified as equity. Effective July 1, 2003, the Company adopted the provisions of SFAS No. 150, which did not materially affect the Company’s financial position or results of operations. In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 requires that contracts with comparable characteris- tics be accounted for similarly. In particular, SFAS No. 149 clarifies Substantially all of the Company’s funds withheld receivable balance is associated with its reinsurance of annuity contracts. The funds withheld receivable balance totaled $2.7 billion at December 31, 2003, of which $2.0 billion are subject to the provisions of Issue B36. Management believes the embedded derivative feature in each of these reinsurance treaties is similar to a total return swap on the assets held by the ceding companies. The Company has developed cash flow models as the basis for estimating the value  of the total return swap. The cash flow models are based on the Company’s expectations of the future cash flows under the reinsurance treaties that in turn are driven by the underlying annuity contracts. The fair value of the total return swap is affected by changes, both actual and expected, in the cash flows of the underlying annuity contracts, changes in credit risk associated with the assets held  by the ceding company and changes in interest rates. The change in fair value, which is a non-cash item, also affects the amortization  of deferred acquisition costs since the Company is required to include it in its expectation of gross profits. The adoption of  Issue B36 resulted in a net gain, after tax and after related amorti- zation of deferred acquisition costs, of approximately $9.0 million, of which approximately $0.5 million was recorded as a cumulative effect of change in accounting principle. At December 31, 2003, In April 2003, the FASB cleared 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”). Issue B36 concluded that (i) a company’s funds withheld payable and/or receivable under certain reinsurance arrangements and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness  of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on  the balance sheet and changes in fair value reported in income.  under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative  contains a financing component, amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements  for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, and amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after  June 30, 2003. In addition, provisions of SFAS No. 149 should be applied prospectively. Effective July 1, 2003, the Company adopted the provisions of SFAS No. 149 with no impact to the consolidated financial statements. THIS IS RGA. 2003 ANNUAL REPORT 45