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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934 For the three months and nine months ended September 30, 2004 Commission File Number 2-39729 COTTON STATES LIFE INSURANCE COMPANY 
 GEORGIA
    
    58-0830929(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 244 Perimeter Center Parkway, N.E., Atlanta, Georgia
    
    30346(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (770) 391-8600 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to the
filing requirements for at least the past 90 days. YES [X] NO [  ] Indicate by check mark whether the registrant is an accelerated Filer (as
defined in Rule 12b.2 of the Exchange Act). YES [  ] NO [X] The aggregate market value of the voting and non-voting common equity held by
non affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity as of
the last business day of the registrants most recently completed second
quarter was $81,199,572 based on the closing price of $19.24 on June 30, 2004,
as reported on the NASDAQ National Market. The Registrant as of November 11, 2004 has 6,322,737 shares of common stock
outstanding.




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COTTON STATES LIFE INSURANCE COMPANY FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 INDEX PagePART 1 - FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsReport of
Independent Registered Public Accounting Firm
    
    
    1Consolidated Condensed Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003
    
    
    2Unaudited Consolidated Condensed Statements of Earnings for the Three months and Nine months ended September 30, 2004 and 2003
    
    
    3Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    4Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three months and Nine months ended September 30, 2004 and 2003
    
    
    5Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Consolidated Condensed Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    26SIGNATURES
    
    
    27EX-11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGSEX-15 LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATIONEX-31.1 SECTION 302 CERTIFICATION FOR CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO




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Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of
Cotton States Life Insurance Company: We have reviewed the condensed consolidated balance sheet of Cotton States Life
Insurance Company and subsidiaries as of September 30, 2004, and the related
condensed consolidated statements of earnings and comprehensive income for the
three-month and nine month periods ended September 30, 2004 and 2003 and the
condensed consolidated statements of cash flows for the nine month periods
ended September 30, 2004 and 2003. These financial statements are the
responsibility of the Companys management. We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated interim financial statements
referred to above for them to be in conformity with U.S. generally accepted
accounting principles. We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Cotton States Life Insurance Company and subsidiaries as of December
31, 2003, and the related consolidated statements of earnings, comprehensive
income and cash flows for the year then ended not presented herein and in our
report dated February 13, 2004, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2003,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived. /s/ Ernst & Young LLP
 Atlanta, Georgia
November 5, 2004 1




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COTTON STATES LIFE INSURANCE COMPANY 
 ITEM I. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 
 Consolidated Condensed Balance Sheets September 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSInvestments:Fixed maturities, held for investment, at amortized
cost (fair value of $883,490 in 2004 and $3,465,161 in 2003)
    
    $
    848,958
    
    
    
    3,348,373Fixed maturities, available for sale, at fair value (amortized
cost of $184,308,227 in 2004 and $174,419,286 in 2003)
    
    
    187,912,810
    
    
    
    178,709,350Equity securities, at fair value (cost of $2,854,854 in 2004
and $2,752,977 in 2003)
    
    
    3,241,104
    
    
    
    3,219,429First mortgage loans on real estate
    
    
    837,811
    
    
    
    1,028,395Policy loans
    
    
    11,348,795
    
    
    
    10,706,565Other invested assets
    
    
    582,000
    
    
    
    582,000Total investments
    
    
    204,771,478
    
    
    
    197,594,112Cash and cash equivalents
    
    
    13,678,282
    
    
    
    9,456,873Accrued investment income
    
    
    2,418,780
    
    
    
    2,548,049Amounts receivable, principally premiums
    
    
    3,839,770
    
    
    
    4,869,767Amount due from reinsurers
    
    
    4,220,973
    
    
    
    4,531,625Deferred policy acquisition costs
    
    
    68,864,192
    
    
    
    63,767,550Federal income tax receivable
    
    
    
    
    
    
    633,853Other assets
    
    
    940,398
    
    
    
    370,543$
    298,733,873
    
    
    
    283,772,372LIABILITIES AND SHAREHOLDERS EQUITYPolicy liabilities and accruals:Future policy benefits
    
    $
    186,421,488
    
    
    
    175,077,154Policy claims and benefits payable
    
    
    2,716,835
    
    
    
    3,527,042Total policy liabilities and accruals
    
    
    189,138,323
    
    
    
    178,604,196Federal income taxes:Current
    
    
    237,774
    
    
    
    Deferred
    
    
    12,710,338
    
    
    
    12,101,542Total federal income taxes
    
    
    12,948,112
    
    
    
    12,101,542Other liabilities
    
    
    7,602,868
    
    
    
    7,457,520Total liabilities
    
    
    209,689,303
    
    
    
    198,163,258Shareholders equity:Common stock of $1 par value. Authorized 20,000,000 shares;
issued: 6,987,331 shares; outstanding: 6,322,737 shares;
restricted: 232,827 shares
    
    
    6,987,331
    
    
    
    6,987,331Additional paid-in capital
    
    
    4,160,213
    
    
    
    4,160,213Accumulated other comprehensive income, net of tax
    
    
    2,464,947
    
    
    
    2,708,616Retained earnings
    
    
    79,582,442
    
    
    
    76,297,876Less:Unearned compensation  restricted stock
    
    
    (602,299
    )
    
    
    (996,858
    )Treasury stock, at cost (431,767 shares)
    
    
    (3,548,064
    )
    
    
    (3,548,064
    )89,044,570
    
    
    
    85,609,114Total shareholders equity
    
    $
    298,733,873
    
    
    
    283,772,372
 See accompanying notes to unaudited consolidated condensed financial statements. 2




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COTTON STATES LIFE INSURANCE COMPANY 
 Unaudited Consolidated Condensed Statements of Earnings
Three Months and Nine Months ending September 30, 2004 and 2003 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue:Premiums
    
    $
    9,413,448
    
    
    
    8,776,978
    
    
    
    27,807,673
    
    
    
    25,799,984Investment income
    
    
    2,182,929
    
    
    
    2,224,128
    
    
    
    6,646,117
    
    
    
    6,680,796Realized investment gains
    
    
    76,518
    
    
    
    253,397
    
    
    
    340,786
    
    
    
    1,489,296Brokerage commissions
    
    
    1,242,620
    
    
    
    1,211,349
    
    
    
    3,204,713
    
    
    
    3,408,974Total revenue
    
    
    12,915,515
    
    
    
    12,465,852
    
    
    
    37,999,289
    
    
    
    37,379,050Benefits and expenses:Benefits and claims
    
    
    5,805,124
    
    
    
    5,083,393
    
    
    
    17,951,789
    
    
    
    15,376,111Interest credited
    
    
    1,445,022
    
    
    
    1,497,835
    
    
    
    4,496,712
    
    
    
    4,466,267Amortization of policy acquisition costs
    
    
    1,435,737
    
    
    
    1,428,323
    
    
    
    3,292,934
    
    
    
    3,736,014Operating expenses
    
    
    2,362,028
    
    
    
    1,788,813
    
    
    
    6,979,624
    
    
    
    6,563,369Total benefits and expense
    
    
    11,047,911
    
    
    
    9,798,364
    
    
    
    32,721,059
    
    
    
    30,141,761Income before income tax expense
    
    
    1,867,604
    
    
    
    2,667,488
    
    
    
    5,278,230
    
    
    
    7,237,289Income tax expense
    
    
    625,997
    
    
    
    782,614
    
    
    
    1,740,755
    
    
    
    2,219,827Net income
    
    $
    1,241,607
    
    
    
    1,884,874
    
    
    
    3,537,475
    
    
    
    5,017,462Basic income per share of common stock
    
    $
    0.20
    
    
    
    0.30
    
    
    
    0.56
    
    
    
    0.79Diluted income per share of common stock
    
    $
    0.19
    
    
    
    0.29
    
    
    
    0.53
    
    
    
    0.76Weighted average number of shares
used in computing income per shareBasic
    
    
    6,322,737
    
    
    
    6,323,737
    
    
    
    6,322,737
    
    
    
    6,323,792Diluted
    
    
    6,648,046
    
    
    
    6,617,889
    
    
    
    6,648,318
    
    
    
    6,616,595Dividends paid per share
    
    $
    0.00
    
    
    
    0.04
    
    
    
    0.04
    
    
    
    0.12
 See accompanying notes to unaudited consolidated condensed financial statements. 3




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COTTON STATES LIFE INSURANCE COMPANY 
 Unaudited Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 2004 and 2003 Nine months endedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    3,537,475
    
    
    
    5,017,462Adjustments to reconcile net income to net
cash provided from operating activities:Realized investment gains
    
    
    (340,786
    )
    
    
    (1,489,296
    )Increase in policy liabilities and accruals
    
    
    10,534,127
    
    
    
    10,299,016Increase in deferred policy acquisition costs
    
    
    (4,834,960
    )
    
    
    (4,537,507
    )Increase in liability for income taxes
    
    
    1,740,755
    
    
    
    758,766Decrease (increase) in amounts receivable and
amounts due from reinsurers
    
    
    1,340,649
    
    
    
    (595,682
    )Increase in amounts due affiliate
    
    
    392,576
    
    
    
    419,879Other, net
    
    
    1,271,222
    
    
    
    1,605,541Net cash provided from operating activities
    
    
    13,641,058
    
    
    
    11,478,179Cash flows from investing activities:Purchase of fixed maturities available for sale
    
    
    (34,642,065
    )
    
    
    (104,939,624
    )Purchase of equity securities
    
    
    (374,624
    )
    
    
    (592,550
    )Sale of fixed maturities available for sale
    
    
    12,020,103
    
    
    
    55,613,923Sale of equity securities
    
    
    335,996
    
    
    
    570,581Proceeds from maturities of fixed
maturities held for investment
    
    
    2,500,000
    
    
    
    3,700,000Proceeds from maturity and redemption of fixed
maturities held for sale
    
    
    12,097,636
    
    
    
    23,361,386Principal collected on first mortgage loans
    
    
    190,584
    
    
    
    239,784Net increase in policy loans
    
    
    (642,230
    )
    
    
    (67,952
    )Other, net
    
    
    (652,140
    )
    
    
    (15,850
    )Net cash used in investing activities
    
    
    (9,166,740
    )
    
    
    (22,130,302
    )Cash flows from financing activities:Cash dividends paid
    
    
    (252,909
    )
    
    
    (764,980
    )Purchase of treasury stock
    
    
    
    
    
    
    (57,126
    )Net cash used by financing activities
    
    
    (252,909
    )
    
    
    (822,106
    )Net increase (decrease) in cash and cash equivalents:
    
    
    4,221,409
    
    
    
    (11,474,229
    )Cash and cash equivalents:Beginning of period
    
    
    9,456,873
    
    
    
    18,913,861End of period
    
    $
    13,678,282
    
    
    
    7,439,632
 See accompanying notes to unaudited consolidated condensed financial statements. 4




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COTTON STATES LIFE INSURANCE COMPANY 
 Unaudited Consolidated Condensed Statements of Comprehensive Income
Three Months and Nine Months ended September 30, 2004 and 2003 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    1,241,607
    
    
    
    1,884,874
    
    
    
    3,537,475
    
    
    
    5,017,462Other comprehensive income (loss),
before tax:Change in fair value of securities
available for sale
    
    
    3,480,354
    
    
    
    (1,688,169
    )
    
    
    (28,409
    )
    
    
    2,528,990Reclassification adjustment for realized
(gains) included in net income
    
    
    (76,518
    )
    
    
    (253,397
    )
    
    
    (340,786
    )
    
    
    (1,489,296
    )Total other comprehensive income (loss)
before tax
    
    
    3,403,836
    
    
    
    (1,941,566
    )
    
    
    (369,195
    )
    
    
    1,039,694Income tax expense (benefit) related to
items of other comprehensive income (loss)
    
    
    1,157,304
    
    
    
    (687,894
    )
    
    
    (125,526
    )
    
    
    325,734Other comprehensive income (loss),
net of tax
    
    
    2,246,532
    
    
    
    (1,253,672
    )
    
    
    (243,669
    )
    
    
    713,960Total comprehensive income
    
    $
    3,488,139
    
    
    
    631,202
    
    
    
    3,293,806
    
    
    
    5,731,422
 See accompanying notes to unaudited consolidated condensed financial statements. 5




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Cotton States Life Insurance Company 
 Notes to Unaudited Consolidated Condensed Financial Statements
(continued)
 Note 1 - Basis of Presentation The accompanying consolidated condensed financial statements include the
accounts of Cotton States Life Insurance Company and its wholly owned
subsidiaries CSI Brokerage Services, Inc., and CS Marketing Resources, Inc.
Significant intercompany transactions and balances are eliminated in the
consolidation. The consolidated condensed financial statements for the three months and nine
months ended September 30, 2004 and 2003 are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. These consolidated condensed
financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Companys
annual report on Form 10-K for the year ended December 31, 2003. In the opinion of management, all adjustments and reclassifications necessary
to present fairly the financial position and the results of operations and cash
flows for the interim periods have been made. All such adjustments are of a
normal and recurring nature. The results of operations for any interim period
are not necessarily indicative of the results of operations that the Company
may achieve for the entire year. Note 2  Stock-Based Compensation In accordance with APB Opinion No. 25, approximately $395,000 and $404,000 in
compensation expense was recorded in the nine months ended September 30, 2004
and 2003, respectively, for the various stock option and restricted stock
awards plans. There were no stock options or restricted stock awarded during
the three month period or the nine month period ended September 30, 2004. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options and restricted stock awards under Statement of
Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, the Companys net income, basic net income per share, and
diluted net income per share would have been reduced to the pro forma amounts
indicated below: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income:As reported
    
    $
    1,241,607
    
    
    
    1,884,874
    
    
    
    3,537,475
    
    
    
    5,017,462Pro forma
    
    $
    1,227,846
    
    
    
    1,869,488
    
    
    
    3,496,193
    
    
    
    4,971,304Basic net income per share:As reported
    
    $
    0.20
    
    
    
    0.30
    
    
    
    0.56
    
    
    
    0.79Pro forma
    
    $
    0.19
    
    
    
    0.30
    
    
    
    0.55
    
    
    
    0.79Diluted net income per
share:As reported
    
    $
    0.19
    
    
    
    0.29
    
    
    
    0.53
    
    
    
    0.76Pro forma
    
    $
    0.18
    
    
    
    0.28
    
    
    
    0.53
    
    
    
    0.75
 The per share weighted-average fair value of stock options and restricted stock
granted was estimated using an option pricing model with the following
weighted-average assumptions: expected life of three years for restricted stock
awarded in 2003; expected dividend yield of 1.67%; risk-free interest rate of
3.5% for 2003; and an expected volatility of 66% for 2003 grants. 6




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Cotton States Life Insurance Company
Notes to Unaudited Consolidated Condensed Financial Statements
(continued) Note 3  Accounting Pronouncements The Company adopted Statement of Position (SOP) 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts, on January 1, 2004. SOP 03-1 establishes
several new accounting and disclosure requirements for certain nontraditional
long-duration contracts and for separate accounts including, among other
things, a requirement that assets and liabilities of separate account
arrangements that do not meet certain criteria be accounted for as general
account assets and liabilities. In addition, the SOP requires additional
liabilities be established for certain guaranteed death benefits and for
products with certain patterns of cost of insurance charges, and that sales
inducements provided to contract holders be recognized on the balance sheet
separately from deferred acquisition costs and amortized as a component of
benefits expense using methodology and assumptions consistent with those used
for amortization of deferred policy acquisition costs. The adoption of SOP
03-1 did not have a significant effect on the Companys results of operations. On October 13, 2004, the FASB concluded that SFAS No. 123R, Share Based
Payments which would require companies to measure compensation cost for all
share-based payments, including employee stock options, would be effective for
public companies for interim or annual periods beginning after June 15, 2005.
Retroactive application of the requirements of SFAS No. 123 and SFAS No. 123R
to the beginning of the fiscal year that includes the effective date would be
permitted, but not required. Early adoption of SFAS No. 123R is encouraged.
The FASB is expected to issue SFAS No. 123R during the fourth quarter of 2004.
Management has not estimated the effect that SFAS No. 123R will have on the
Companys results of operations, but does not believe that it will be
significant. Note 4 - Legal Proceedings The Company is a defendant in various actions incidental to the conduct of its
business. While the ultimate outcome of these matters cannot be estimated with
certainty, management does not believe the actions are reasonably likely to
result in a material loss to the Company. The Company has reached a partial settlement regarding $900,000 in reinsurance
coverage. In addition, a lawsuit was initiated by the Company in the third
quarter of 2001. To date the Company has received approximately $475,000 and
continues to seek additional recoveries against the reinsurance brokers through
already existing legal channels. During the fourth quarter of 2003 the Company
determined it to be probable that approximately $200,000 of the outstanding
balance would be uncollectible and reduced the receivable by that amount. The
Company believes the remaining $193,000 outstanding to be fully recoverable and
has included it in reinsurance receivable on the consolidated balance sheet. Note 5  Business Segments The Companys operations include the following three major segments,
differentiated primarily by their respective methods of distribution and the
nature of related products: individual life insurance, guaranteed and
simplified issue life insurance, and brokerage operations. The Companys
operations in each segment are concentrated within its southeastern states
geographic market. Individual life insurance products are distributed through
the Companys multi-line exclusive agents, guaranteed and simplified issue
products are distributed through independent agents as well as exclusive
agents, and brokerage operations all involve third party products distributed
through the Companys exclusive and independent agents. The Company does not
group items on the consolidated condensed balance sheet into segments, nor does
it analyze those items by segment when making management decisions. Investment
income is allocated to the individual life insurance and guaranteed and
simplified issue life insurance segments based on their respective average
future policy benefit reserves. Investment income for the brokerage operations
segment is determined directly by each subsidiarys investment portfolio. 7




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Cotton States Life Insurance Company
Notes to Unaudited Consolidated Condensed Financial Statements
(continued) Total revenue and net income by business segment are as follows (dollars in
thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Individual life insurance:Premiums
    
    $
    5,283
    
    
    
    5,130
    
    
    
    15,692
    
    
    
    15,190Investment income
    
    
    1,888
    
    
    
    1,959
    
    
    
    5,774
    
    
    
    5,916Realized investment gains
    
    
    66
    
    
    
    221
    
    
    
    295
    
    
    
    1,319Total revenue
    
    $
    7,237
    
    
    
    7,310
    
    
    
    21,761
    
    
    
    22,425Net income
    
    $
    353
    
    
    
    1,100
    
    
    
    1,815
    
    
    
    3,157Guaranteed and simplified issue
life insurance:Premiums
    
    $
    4,130
    
    
    
    3,647
    
    
    
    12,116
    
    
    
    10,610Investment income
    
    
    293
    
    
    
    263
    
    
    
    867
    
    
    
    759Realized investment gains
    
    
    11
    
    
    
    32
    
    
    
    45
    
    
    
    170Total revenue
    
    $
    4,434
    
    
    
    3,942
    
    
    
    13,028
    
    
    
    11,539Net income
    
    $
    203
    
    
    
    61
    
    
    
    30
    
    
    
    87Brokerage:Commission income
    
    $
    1,243
    
    
    
    1,211
    
    
    
    3,205
    
    
    
    3,409Investment income
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    6Total revenue
    
    $
    1,245
    
    
    
    1,214
    
    
    
    3,210
    
    
    
    3,415Net income
    
    $
    686
    
    
    
    724
    
    
    
    1,692
    
    
    
    1,773Total revenue
    
    $
    12,916
    
    
    
    12,466
    
    
    
    37,999
    
    
    
    37,379Total net income
    
    $
    1,242
    
    
    
    1,885
    
    
    
    3,537
    
    
    
    5,017
 Note 6 - Income Taxes The Company accounts for income taxes using the asset and liability method
prescribed by SFAS No. 109, Accounting for Income Taxes. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities,
and their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. Income tax expense recognized by the Company in any one year is impacted by the
extent to which the Company qualifies for the small life company deduction.
The small life company deduction is 60% of life insurance company taxable
income up to a maximum taxable income of $3 million. This deduction is phased
out on taxable income above $3 million up to and including a maximum of $15
million. To the extent, if any, that the Companys taxable income exceeds $3
million, its effective federal income tax rate will increase. 8




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##### Table of Contents



Cotton States Life Insurance Company
Notes to Unaudited Consolidated Condensed Financial Statements
(continued) Note 7 - Treasury Stock There were no changes in the Companys capital structure for the three months
or nine months ended September 30, 2004. Note 8 - Retirement Plans and Other Postretirement Benefits The Company, in conjunction with Cotton States Mutual (Mutual) and Shield
Insurance Company (Shield), its affiliates, sponsors a non-contributory
defined benefit pension plan covering all eligible employees. Plan benefits
are based on the age of the employee, the employees average salary for the
highest five consecutive years of compensation and the employees years of
service. The Company and its affiliates are charged the allocable share of
benefit costs based on their proportionate share of payroll. In addition to
pension benefits, the Company has a plan which provides for postretirement
health care and life insurance benefits for certain employees. These benefits
include major medical insurance with deductible and coinsurance provisions.
The Company accrues benefits based on actuarial calculations and the plan is
not funded. The following tables summarize benefit cost of the pension plan and other
postretirement benefit plan for the three months and nine months ended
September 30, 2004 and 2003: Three Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Pension Benefits
    
    Other BenefitsService cost
    
    $
    19,132
    
    
    
    17,128
    
    
    
    
    
    
    
    Interest cost
    
    
    40,718
    
    
    
    37,841
    
    
    
    1,609
    
    
    
    2,040Expected return on plan assets
    
    
    (33,717
    )
    
    
    (31,075
    )
    
    
    
    
    
    
    Amount of unrecognized gains and losses
    
    
    2,215
    
    
    
    
    
    
    
    (1,944
    )
    
    
    (1,781
    )Amount of prior service cost recognized
    
    
    991
    
    
    
    990
    
    
    
    
    
    
    
    Total net periodic benefit cost (income)
    
    $
    29,339
    
    
    
    24,884
    
    
    
    (335
    )
    
    
    259
 Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Pension Benefits
    
    Other BenefitsService cost
    
    $
    57,395
    
    
    
    51,384
    
    
    
    
    
    
    
    Interest cost
    
    
    122,156
    
    
    
    113,523
    
    
    
    4,827
    
    
    
    6,120Expected return on plan assets
    
    
    (101,150
    )
    
    
    (93,225
    )
    
    
    
    
    
    
    Amount of unrecognized gains and losses
    
    
    6,645
    
    
    
    
    
    
    
    (5,832
    )
    
    
    (5,343
    )Amount of prior service cost recognized
    
    
    2,971
    
    
    
    2,970
    
    
    
    
    
    
    
    Total net periodic benefit cost (income)
    
    $
    88,017
    
    
    
    74,652
    
    
    
    (1,005
    )
    
    
    777
 In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was signed into law. The Act introduces a voluntary
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care plans that provide at least an actuarially
equivalent benefit. The Department of Health and Human Services (HHS) is
expected to issue regulations that define actuarial equivalence later this
year. As a result of the Act, in May 2004, the Financial Accounting Standards
Board issued Staff Position FAS 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, 9




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##### Table of Contents



Cotton States Life Insurance Company
Notes to Unaudited Consolidated Condensed Financial Statements
(continued) Improvement and Modernization Act of 2003. Under Staff Position FAS 106-2,
benefit obligations are required to be remeasured and reported as an actuarial
gain if enactment of the Act is determined to be a significant event pursuant
to the provisions of SFAS No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions. In the absence of a definition of actuarial
equivalency, the Company is unable to conclude if the Act has a significant
effect on benefit obligations and therefore has not performed a remeasurement.
The Company will remeasure benefit obligations when HHS establishes actuarial
equivalency definitions and it is determined that enactment of the Act is
significant to the other benefits obligation. Note 9  Significant Events On December 30, 2003, it was announced that the Cotton States Insurance Group
(which includes the Company and Mutual) and COUNTRY Insurance & Financial
Services (COUNTRY), located in Bloomington, Illinois, entered into definitive
agreements regarding the acquisition of the Company by merger. Under the
Agreement and Plan of Merger, the Companys shareholders will receive $20.25
cash for each share of outstanding common stock of the Company. As a result,
the Company will become a privately-held company. Subject to regulatory
approval, shareholder approval, and other conditions to closing set forth in
the Agreement and Plan of Merger, it is anticipated that the transaction will
close in January 2005. On October 25, 2004, the shareholders of the Company approved the Agreement and
Plan of Merger between the Company and a subsidiary of COUNTRY Life Insurance
Company. 10




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF CONSOLIDATED
CONDENSED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Significant Events On December 30, 2003, it was announced that the Cotton States Insurance Group
(which includes the Company and Mutual) and COUNTRY Insurance & Financial
Services (COUNTRY), located in Bloomington, Illinois, entered into definitive
agreements regarding the acquisition of the Company by merger. Under the
Agreement and Plan of Merger, the Companys shareholders will receive $20.25
cash for each share of outstanding common stock of the Company. As a result,
the Company will become a privately-held company. Subject to regulatory
approval, shareholder approval, and other conditions to closing set forth in
the Agreement and Plan of Merger, it is anticipated that the transaction will
close in January 2005. On October 25, 2004, the shareholders of the Company approved the Agreement and
Plan of Merger between the Company and a subsidiary of COUNTRY Life Insurance
Company. Forward-Looking Statements The following discussion contains forward-looking statements that are not
strictly historical and that involve risks and uncertainties. Such statements
include, without limitations, any statements containing the words believe,
anticipate, estimate, expect, intend, plan, seek, and similar
expressions. Investors are cautioned about such statements, including, without
limitation, statements regarding projections of earnings, revenues, expected
mortality rates, investment spreads and yields and their effects on net
earnings, the ability to consummate the contemplated transaction with COUNTRY
and the timing thereof, if at all, and the anticipated financial results and
benefits of the proposed transaction with COUNTRY. The forward-looking
statements set forth herein involve certain risks, uncertainties, estimates,
and assumptions that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. These risks and
uncertainties include, without limitation, the following:  
    
    The Company and COUNTRY must satisfy certain conditions to closing
set forth in the Agreement and Plan of Merger, including, without
limitation, receipt of necessary regulatory approvals, which may not
occur.  
    
    Insurance is a highly competitive industry, and the Company
encounters significant competition in all lines of business from other
insurance companies, many of which have greater financial resources than
the Company, as well as competition from other providers of financial
services.  
    
    Since insurance is a regulated business, with a high public profile,
it is always possible that legislation may be enacted which would have
an adverse effect on the Companys business.  
    
    The Company is subject to government regulation in each of the states
in which it conducts business. Such regulation is vested in state
agencies having broad administrative power dealing with many aspects of
the insurance business, which may include premium rates, marketing
practices, advertising, policy forms, and capital adequacy. The Company
cannot predict the form of any future regulatory initiatives or its
impact on the Companys operations or its effect on the Companys
financial performance.  
    
    Increased public and regulatory concerns regarding the financial
stability of insurance companies have resulted in policyholders placing
greater emphasis upon company ratings and have created some measure of
competitive advantage for insurance carriers with higher ratings. As of
the date of this Quarterly Report on Form 10-Q, A.M. Best & Co., a
leading insurance company rating agency, has assigned a B++ (Very Good)
rating to the Company. If this rating is downgraded from its current
level, sales of the Companys products could be adversely affected. 11




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##### Table of Contents




    
    The Companys financial results may fluctuate from year-to-year or be
adversely affected on account of fluctuations in policy claims received by
the Company.  
    
    The Companys investments are subject to risks. The Companys
invested assets are subject to customary risks of defaults and changes
in market values. Factors that may affect the overall default rate on,
and market value of, the Companys invested assets include interest rate
levels, financial market performance, and general economic conditions.  
    
    Through underwriting and reinsurance, the Company has attempted to
limit its mortality and morbidity exposure and has established reserves
for claims and future policy benefits based on accepted actuarial
methodologies. There can be no assurance, however, that these estimated
reserves will prove to be sufficient or that the Company will not
experience adverse mortality or morbidity experience which would result
in operating losses.  
    
    In order to reduce risk and to increase its underwriting capacity,
the Company obtains reinsurance from reinsurers. The Company is subject
to credit risk with respect to its reinsurers because reinsurance does
not relieve the Company of its liability to its insureds for the risks
ceded to reinsurers. Although the Company places its reinsurance with
reinsurers it believes to be financially stable, a reinsurers
subsequent insolvency or inability to make payments under the terms of a
reinsurance treaty could have a material adverse effect on the Company.  
    
    The Company is in direct competition with a large number of insurance
companies, many of which offer a greater number of products through a
greater number of agents and have greater resources than the Company.
This competitive environment could result in lower premiums, less
favorable underwriting terms and conditions, loss of underwriting
opportunities and reduced profitability. The Company expressly disclaims any obligation to update these forward-looking
statements. Critical Accounting Estimates The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: deferred policy acquisition costs, investments, reserves, and
accounting for income taxes. In developing these estimates management makes
subjective and complex judgments that are inherently uncertain and subject to
material change as facts and circumstances develop. Although variability is
inherent in these estimates, management believes the amounts provided are
appropriate based upon the facts available upon compilation of the financial
statements. Deferred Policy Acquisition Costs Policy acquisition costs, which include commissions and certain other
expenses that vary with and are primarily associated with acquiring business,
are deferred and amortized with interest over the estimated lives of the
contracts, usually 30 years. The principal expenses deferred are commissions
and certain expenses of the policy issue, underwriting and agency
departments. Policy acquisition costs deferred were $2.8 million for the
three months ended September 30, 2004 and 2003 and were $8.3 million for the
nine months ended September 30, 2004 and 2003. For statutory accounting
purposes, such costs are expensed as incurred. These deferred costs are recorded as an asset commonly referred to as
deferred policy acquisition costs (DAC). The carrying value of the
Companys DAC asset was $68.9 million at September 30, 2004 and $63.8 million
at December 31, 2003. 12




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##### Table of Contents



SFAS No. 60 Accounting and Reporting by Insurance Enterprises applies to
our traditional life policies. For traditional life policies, deferred costs
are amortized in proportion to the ratio of the annual premium income to the
total present value of expected premium income. Future premium income is
estimated using actuarial assumptions established at policy issue such as
mortality, persistency and interest. Assumptions established at policy issue
are based on anticipated experience, which, together with interest and
expense assumptions, provide a margin for adverse deviation. Should the
liabilities for future policy benefits plus the present value of expected
future gross premiums for a product be insufficient to provide for expected
future benefits and expenses for that product, deferred acquisition costs
will be written off and thereafter, if required, a premium deficiency reserve
will be established by a charge to income. Changes in the assumptions for
mortality, persistency and interest could result in material changes to the
financial statements. SFAS No. 97 Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments applies to our universal life-type contracts. Acquisition costs
are deferred and recognized as expense as a constant percentage of gross
profit using assumptions as to mortality, persistency, maintenance expense
and interest margins established at policy issue without provision for
adverse deviation. First-year excess expense charges are also deferred and
accreted to income in the same manner as deferrable costs are amortized. The
amortized percentage of gross profit is revised periodically to reflect
emerging actual experience and any material changes in expected future
experience. Changes in the emerged actual experience or changes in expected
future experience for mortality, persistency, maintenance expense and
interest margins could result in material changes to the financial
statements. Investments Investment income is an important source of revenue, and the Companys return
on invested assets has a material effect on net income. The Companys
investment policy is subject to the requirements of insurance regulatory
authorities. In addition, certain assets are held on deposit in specified
states and invested in specified securities in order to comply with state
law. Although the Company closely monitors its investment portfolio,
available yields on newly invested funds and gains or losses on existing
investments depend primarily on general market conditions. Investment policy is determined by the Board of Directors of the Company.
The Companys current investment policy is to balance its portfolio between
long-term and short-term investments so as to achieve long-term returns
consistent with the preservation of capital and maintenance of adequate
liquidity to meet the payment of the Companys policy benefits and claims.
The Companys invested asset maturities correspond with the Companys
expectations regarding anticipated cash flow payments based on the Companys
policy benefit and claim cycle. The Company invests primarily in fixed
maturity securities of the U.S. government and its related agencies,
investment grade fixed maturity corporate securities and mortgage-backed
securities. The Companys investments in equity securities and the majority of its
investments in fixed maturity securities are classified as
available-for-sale as defined in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Accordingly, these securities
are carried at fair value with the after-tax difference from amortized cost
reflected in stockholders equity as a component of accumulated other
comprehensive income. Approximately 0.5% of the Companys investments in fixed maturity investments
are classified as held-for-investment as defined in SFAS No. 115 and are
carried at amortized cost. Policy loans are carried at the outstanding
balance, which approximates fair value. Other investments primarily consist
of mortgage loans and a partnership interest. Mortgage loans on real estate
are recorded at the outstanding principal balance adjusted for amortization
of premiums or discounts and net of valuation allowances, if any. The
partnership is carried at cost. 13




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##### Table of Contents



Other-Than-Temporary Impairments One of the significant estimations inherent in the valuation of investments
is the evaluation of other-than-temporary impairments. The evaluation of
impairments is a quantitative and qualitative process, which is subject to
risks and uncertainties and is intended to determine whether declines in the
fair value of investments should be recognized in current period earnings.
The risks and uncertainties include changes in general economic conditions,
the issuers financial condition or near term recovery prospects and the
effects of changes in interest rates. The Companys accounting policy
requires that a decline in the value of a security below its amortized cost
basis be assessed to determine if the decline is other-than-temporary. If
so, the security is deemed to be other-than-temporarily impaired, and a
charge is recorded in net realized capital losses equal to the difference
between the fair value and amortized cost basis of the security. The fair
value of the other-than-temporarily impaired investment becomes its new cost
basis. The Company has a security monitoring process that identifies
securities that, due to certain characteristics, as described below, are
subjected to an enhanced analysis on a quarterly basis. Securities that are depressed by 20% or more for 12 months or by 30% for six
months are presumed to be other-than-temporarily impaired unless the
depression is the result of rising interest rates or significant objective
verifiable evidence supports that the security price is temporarily depressed
and is expected to recover within a reasonable period of time. Securities
depressed less than 20% or depressed 20% or more but for less than 12 months
or depressed 30% or more but for less than six months are also reviewed to
determine if an other-than-temporary impairment is present. The primary
factors considered in evaluating whether a decline in value for securities is
other-than-temporary include: (a) the length of time and the extent to which
the fair value has been less than cost, (b) the financial condition, credit
rating and near-term prospects of the issuer, (c) whether the debtor is
current on contractually obligated interest and principal payments and (d)
the intent and ability of the Company to retain the investment for a period
of time sufficient to allow for recovery. Reserves The Company establishes and carries as liabilities actuarially determined
reserves which are calculated to meet the Companys estimated future
obligations. Reserves for life insurance and disability contracts are based
on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect the
Companys actual experience when appropriate. These reserves are computed at
amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Companys policy obligations at their
maturities or in the event of an insureds death. Changes in or deviations
from the assumptions used for mortality, morbidity, expected future premiums
and interest can significantly affect the Companys reserve levels and
related future operations. Reserves also include unearned premiums, premium
deposits, claims incurred but not reported and claims reported but not yet
paid. Reserves for assumed and ceded reinsurance are computed in a manner
that is comparable to direct insurance reserves. The liability for policy benefits for universal life-type contracts is equal
to the balance that accrues to the benefit of policyholders, including
credited interest, amounts that have been assessed to compensate the Company
for services to be performed over future periods, and any amounts previously
assessed against policyholders that are refundable on termination of the
contract. 14




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##### Table of Contents



Accounting for Income Taxes The Company accounts for income taxes using the asset and liability method
prescribed by SFAS No. 109, Accounting for Income Taxes. Under the asset
and liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities, and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which these temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Income tax expense recognized by the Company in any one year is impacted by
the extent to which the Company qualifies for the small life company
deduction. The small life company deduction is 60% of life insurance company
taxable income up to a maximum taxable income of $3 million. This deduction
is phased out on taxable income above $3 million up to and including a
maximum of $15 million. To the extent, if any, that the Companys taxable
income exceeds $3 million, its effective federal income tax rate will
increase. Recent Accounting Pronouncements The Company adopted Statement of Position (SOP) 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts, on January 1, 2004. SOP 03-1 establishes
several new accounting and disclosure requirements for certain nontraditional
long-duration contracts and for separate accounts including, among other
things, a requirement that assets and liabilities of separate account
arrangements that do not meet certain criteria be accounted for as general
account assets and liabilities. In addition, the SOP requires additional
liabilities be established for certain guaranteed death benefits and for
products with certain patterns of cost of insurance charges, and that sales
inducements provided to contractholders be recognized on the balance sheet
separately from deferred acquisition costs and amortized as a component of
benefits expense using methodology and assumptions consistent with those used
for amortization of deferred policy acquisition costs. The adoption of SOP
03-1 did not have a significant effect on the Companys results of operations. On October 13, 2004, the FASB concluded that SFAS No. 123R, Share Based
Payments which would require companies to measure compensation cost for all
share-based payments, including employee stock options, would be effective for
public companies for interim or annual periods beginning after June 15, 2005.
Retroactive application of the requirements of SFAS No. 123 and SFAS No. 123R
to the beginning of the fiscal year that includes the effective date would be
permitted, but not required. Early adoption of SFAS No. 123R is encouraged.
The FASB is expected to issue SFAS No. 123R during the fourth quarter of 2004.
Management has not estimated the effect that SFAS No. 123R will have on the
Companys results of operations, but does not believe that it will be
significant. 15




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##### Table of Contents



Results of Operations Net Income Following is a summary of net income by business segment for the three months
and nine months ended September 30, 2004 and 2003 (dollars in thousands): Three Months EndedSeptember 30,
    
    Increase2004
    
    2003
    
    (Decrease)Guaranteed and
simplified issue
    
    $
    203
    
    
    
    61
    
    
    
    233
    %Individual life insurance:Traditional
    
    
    98
    
    
    
    269
    
    
    
    (64
    %)Universal life
    
    
    255
    
    
    
    831
    
    
    
    (69
    %)Total individual life insurance
    
    
    353
    
    
    
    1,100
    
    
    
    (68
    %)Brokerage operations
    
    
    686
    
    
    
    724
    
    
    
    (5
    %)Net income
    
    $
    1,242
    
    
    
    1,885
    
    
    
    (34
    %)
 Nine Months EndedSeptember 30,2004
    
    2003
    
    (Decrease)Guaranteed and
simplified issue
    
    $
    30
    
    
    
    87
    
    
    
    (66
    %)Individual life insurance:Traditional
    
    
    468
    
    
    
    843
    
    
    
    (44
    %)Universal life
    
    
    1,347
    
    
    
    2,314
    
    
    
    (42
    %)Total individual life insurance
    
    
    1,815
    
    
    
    3,157
    
    
    
    (43
    %)Brokerage operations
    
    
    1,692
    
    
    
    1,773
    
    
    
    (5
    %)Net income
    
    $
    3,537
    
    
    
    5,017
    
    
    
    (29
    %)
 Net income for the nine months ended September 30, 2004 decreased compared to
the same period in 2003 due to a significant increase in first quarter 2004
mortality experience, partially offset by the continued strong growth in
premiums. This increase in mortality does not appear to be from any
particular cause, nor is it attributable to any single line of business.
Mortality experience during the third quarter of 2004 improved to levels more
consistent with managements expectations. Better than expected mortality
experience in the third quarter of 2003 coupled with lower management
incentive costs during the same period and increased transaction costs in the
third quarter of 2004 in anticipation of the acquisition and plan of merger
with COUNTRY contributed to the decrease in net income for the three months
ended September 30, 2004 compared to the same period of 2003. 16




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##### Table of Contents



Premiums A summary of premiums by business segment for the three months and nine
months ended September 30, 2004 and 2003 is as follows (dollars in
thousands): Three Months EndedSeptember 30,
    
    Increase2004
    
    2003
    
    (Decrease)Guaranteed and simplified
issue life insurance
    
    $
    4,130
    
    
    
    3,647
    
    
    
    13
    %Individual life insurance:Traditional life
    
    
    1,930
    
    
    
    1,734
    
    
    
    11
    %Universal life
    
    
    3,353
    
    
    
    3,396
    
    
    
    (1
    %)Total individual
life insurance
    
    
    5,283
    
    
    
    5,130
    
    
    
    3
    %Total premiums
    
    $
    9,413
    
    
    
    8,777
    
    
    
    7
    %
 Nine Months EndedSeptember 30,2004
    
    2003
    
    IncreaseGuaranteed and simplified
issue life insurance
    
    $
    12,116
    
    
    
    10,610
    
    
    
    14
    %Individual life insurance:Traditional life
    
    
    5,637
    
    
    
    5,229
    
    
    
    8
    %Universal life
    
    
    10,055
    
    
    
    9,961
    
    
    
    1
    %Total individual
life insurance
    
    
    15,692
    
    
    
    15,190
    
    
    
    3
    %Total premiums
    
    $
    27,808
    
    
    
    25,800
    
    
    
    8
    %
 Guaranteed and simplified issue life insurance premiums continued to show
significant growth as a result of higher production by the independent agency
force which had approximately 4,700 agents under contract at September 30,
2004 and 2003. This product is also distributed by the Companys multi-line
exclusive agents and is available for purchase over the internet at the
Companys home page, www.cottonstatesinsurance.com. Individual life insurance products are principally sold by the Companys
exclusive agent producers. Growth in individual life premiums largely
reflects the popularity of the Companys participating whole life product.
The Company has 250 exclusive agents under contract at September 30, 2004. Investment Income and Realized Gains and Losses Investment income decreased 2% for the third quarter of 2004 as compared to
the third quarter of 2003. For the first nine months of 2004, investment
income decreased 1% as compared to the same period of 2003. This was
primarily a result of decreases in the annualized average yield to 4.4%
compared to 4.7% for the three months ended September 30 and to 4.5% compared
to 5.0% for the nine months ended September 30. These decreases in the
annualized average yield were partially offset by higher investment balances
in 2004. The average gross annual yield on fixed maturities declined in 2004 compared
with 2003 due to declining market reinvestment interest rates. The Companys
portfolio has an average effective duration of approximately four years,
which reflects the medium-term nature of its liabilities. As a result, a
significant portion of the portfolio matures and is reinvested each year.
Market interest rates dropped significantly from 17




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##### Table of Contents



mid-2002 through the first half of 2003 and have increased slightly through
the first nine months of 2004. The average yield on a five-year U.S.
Treasury note declined from 4.45% for the first half of 2002 to 2.75% for the
first half of 2003 and increased to 3.39% for the first nine months of 2004.
At September 30, 2004, the market yield for five year U.S. Treasury
Securities was 3.37%. The Company anticipates that the investment yield on
its portfolio will continue to decline if market interest rates remain at
current levels. Details of net investment income for the three months and nine months ended
September 30, 2004 and 2003 are as follows (dollars in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Investment income:Fixed maturities held for
investment
    
    $
    19
    
    
    
    49
    
    
    
    111
    
    
    
    192Fixed maturities available for sale
    
    
    1,992
    
    
    
    1,994
    
    
    
    6,022
    
    
    
    5,965Equity securities
    
    
    12
    
    
    
    11
    
    
    
    34
    
    
    
    33First mortgage loans
    
    
    17
    
    
    
    23
    
    
    
    57
    
    
    
    74Policy loans
    
    
    196
    
    
    
    190
    
    
    
    595
    
    
    
    572Short-term investments
    
    
    35
    
    
    
    50
    
    
    
    91
    
    
    
    106Gross investment income
    
    $
    2,271
    
    
    
    2,317
    
    
    
    6,910
    
    
    
    6,942Less investment expenses
    
    
    88
    
    
    
    93
    
    
    
    264
    
    
    
    261Net investment income
    
    $
    2,183
    
    
    
    2,224
    
    
    
    6,646
    
    
    
    6,681Yield on
average invested assets(1)
    
    
    4.4
    %
    
    
    4.7
    %
    
    
    4.5
    %
    
    
    5.0
    %Gross gains on sales
    
    $
    77
    
    
    
    406
    
    
    
    370
    
    
    
    2,098Gross losses on sales
    
    
    
    
    
    
    (153
    )
    
    
    (29
    )
    
    
    (253
    )Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (356
    )Net realized capital gains, before tax
    
    $
    77
    
    
    
    253
    
    
    
    341
    
    
    
    1,489
  (1)
    
    Represents net investment income (excluding net realized
capital gains (losses)) divided by average invested assets at cost
or amortized cost, as applicable. Average invested assets are
calculated by dividing the sum of the beginning and ending period
amounts by two. During the first quarter of 2003 the Company realized a pre-tax investment
loss of $356,000 from the write-down of the carrying value of twelve equity
securities. These write-downs were the result of the Company determining
that an other-than-temporary impairment had occurred. The Company has procedures in place to monitor all debt and equity securities
for possible other-than-temporary impairments. Securities are tracked
comparing both unrealized losses as a percentage of original cost and length
of time the security has been below a predetermined percentage of cost.
Monthly discussions are held with Companys investment managers to gather
information and documentation as to their outlook for future recovery of the
securities making the Companys watch list. As of September 30, 2004 there
were no debt or equity securities whose unrealized losses would be deemed to
be other-than-temporary impairments. Brokerage Commissions Exclusive agents also sell products that the Cotton States Group does not
underwrite (both life and property and casualty). Brokerage commissions
decreased 6% for the first nine months of 2004 as compared to the same period
in 2003 due to the cancellation, effective January 1, 2004, of an agreement
providing override 18




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##### Table of Contents



commission on the sales of federal multi-peril crop insurance and crop/hail
insurance products. The financial impact from the cancellation of this
agreement was partially offset by an increase in override commissions from
higher production levels in the third quarter of 2004, which accounted for a
3% increase in brokerage commissions for the three months ended September 30,
2004 as compared to the same period in 2003. Benefits and Claims Life benefits and claims by business segment, including reserve increases on
traditional life and guaranteed and simplified issue products are as follows
(dollars in thousands): Three Months Ended September 30,2004
    
    2003Benefits
    
    % of
    
    Benefits
    
    % ofand Claims
    
    Premium
    
    and Claims
    
    PremiumGuaranteed and
simplified issue
    
    $
    3,163
    
    
    
    77
    %
    
    
    2,841
    
    
    
    78
    %Individual life insuranceTraditional life
    
    
    1,161
    
    
    
    60
    %
    
    
    1,326
    
    
    
    76
    %Universal life
    
    
    1,481
    
    
    
    44
    %
    
    
    916
    
    
    
    27
    %Total individual life insurance
    
    
    2,642
    
    
    
    50
    %
    
    
    2,242
    
    
    
    44
    %Total benefits and claims
    
    $
    5,805
    
    
    
    62
    %
    
    
    5,083
    
    
    
    58
    %
 Nine Months Ended September 30,2004
    
    2003Benefits
    
    % of
    
    Benefits
    
    % ofand Claims
    
    Premium
    
    and Claims
    
    PremiumGuaranteed and
simplified issue
    
    $
    9,740
    
    
    
    80
    %
    
    
    8,486
    
    
    
    80
    %Individual life insuranceTraditional life
    
    
    3,943
    
    
    
    70
    %
    
    
    3,803
    
    
    
    73
    %Universal life
    
    
    4,269
    
    
    
    42
    %
    
    
    3,087
    
    
    
    31
    %Total individual life insurance
    
    
    8,212
    
    
    
    52
    %
    
    
    6,890
    
    
    
    45
    %Total benefits and claims
    
    $
    17,952
    
    
    
    65
    %
    
    
    15,376
    
    
    
    60
    %
 Benefits and claims as a percentage of premiums fluctuate within a normal
range reflecting volatility in mortality, changes in mix of business, and age
of policyholders. Total benefits and claims increased in 2004 due to a
significant increase in mortality experience during the first quarter. The
increase in mortality does not appear to be from any particular cause, nor
can it be attributed to any single line of business. While benefits and
claims have improved to levels more consistent with managements expectations
for the three months ended September 30, 2004, year-to-date levels still
exceed expected levels due to the first quarter fluctuation. Due to the Companys small size, quarterly fluctuations do and will occur.
The Company offsets the effects of annual mortality fluctuations by routinely
purchasing annual aggregate stop loss reinsurance coverage in excess of 120%
of expected mortality. In addition, the Companys general policy is to
retain, with respect to individual life policies, generally no more than
$100,000 of insurance on any one life. 19




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##### Table of Contents



Interest Credited to Policyholders Interest credited to universal life contracts decreased 4% for the three
month period ended September 30, 2004 as compared to the same period in 2003,
and increased 1% for the first nine months of 2004 as compared to the same
period last year. These changes reflect growth in universal life policy
accumulations, offset by reductions to the annual interest rate credited to
policyholders. The Company lowered the annual interest rate credited to
universal life contract accumulations to 5% effective July 1, 2004. The
annual interest rate credited was 5.75% for the first two months of 2003 and
was lowered to 5.4% effective March 1, 2003. Amortization of Policy Acquisition Costs and Operating Expenses The amortization of policy acquisition costs as a percentage of premiums was
15% and 16% for the three months ended September 30, 2004 and 2003,
respectively, and was 12% and 14% for the nine months ended September 30,
2004 and 2003, respectively. Amortization for 2004 reflects the second
quarter re-estimation of future gross profits on the Companys universal life
contracts due to a decrease in the annual interest rate credited to
policyholder funds and emerging gross profit experience. 2004 traditional
life amortization costs were recognized as a constant percentage of gross
premiums using actuarial assumptions established at issue. Results for the
nine months ended September 30, 2003 are within the Companys expected range
of 12-14%. Amortization for the quarters ended September 30, 2004 and 2003
reflects higher than expected lapse rates in the traditional lines of
business. Operating expenses as a percentage of premiums were 25% for the first nine
months of 2004 and 2003 and were 25% and 20% for the three months ended
September 30, 2004 and 2003, respectively. The Company incurred some
transaction related costs associated with the anticipated merger with COUNTRY
in the third quarter of 2004 and experienced some expense savings in the
third quarter of 2003 primarily due to the reduction of certain performance
based compensation costs. Management expects operating expenses to increase
as a percentage of premium as additional costs associated with the
anticipated merger with COUNTRY are incurred. Income Tax Expense The effective tax rate for the first nine months of 2004 and 2003 was 33% and
31%, respectively. The two percentage point decrease is the result of a
change in the estimated allowable small company deduction. The effective
rate reflects the Companys best estimate of the annual effective rate. Liquidity and Capital Resources Liquidity and Cash Flow Liquidity is a measure of a companys ability to generate sufficient cash
flows to meet the short and long-term cash requirements of its business
operations. The liquidity requirements of the Companys business have been
met primarily by funds generated from operations, asset maturities and income
received on investments. Cash provided from these sources is used primarily
for benefits and claims and operating expenses. The timing and amount of
reinsurance recoveries may be affected by reinsurer solvency and by
reinsurance coverage disputes. In the opinion of the Companys management,
the Companys future liquidity needs will be met from all of the above
sources. Net cash flows provided by operating activities totaled $13.1 million for the
first nine months of 2004 compared to $11.5 million for the comparable period
in 2003. Operating cash flow is primarily used to purchase debt securities.
The Company received proceeds of $14.6 million from investment maturities and
repayments in 2004, adding to available cash flows. Such proceeds were $27.1
million in 2003. When market opportunities arise, the Company disposes of
selected debt securities available for sale in an attempt to improve future
investment yields and/or improve duration matching of our assets and
liabilities. Therefore, 20




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##### Table of Contents



dispositions before maturity can vary significantly from year to year.
Proceeds from sales prior to maturity were $12.0 million in 2004 and $55.6
million for the comparable period in 2003. Net cash flows used in investing activities totaled $8.6 million for the
first nine months of 2004 and $22.1 million for the comparable period in
2003. The net cash flows used in investing activities primarily reflect the
investing of net cash from operating activities. Net cash flows used in financing activities totaled $0.3 million and $0.8
million for the first nine months of 2004 and 2003, respectively. The
Companys principal financing activity is payment of dividends to the
Companys shareholders. Dividends are normally declared quarterly and must
be approved by the Board of Directors. Pursuant to the Agreement and Plan of
Merger with COUNTRY, the Company is prohibited from paying future dividends
to shareholders, with the exception of the $.04 per share dividend declared
February 24, 2004, paid April 5, 2004, without the express written consent of
COUNTRY. Additionally, any dividends paid by the Company are subject to the
regulations of the insurance laws and practices of the Georgia Department of
Insurance, which generally allows life and health insurance companies to make
dividend payments equal to or less than the greater of 10% of statutory
surplus as regards policyholders as of the preceding December 31 or the net
gain from operations, excluding realized gains or losses, for the twelve
month period ending on the preceding December 31. Dividends exceeding the
applicable threshold are considered extraordinary and require the prior
approval of the Georgia Insurance Commissioner. Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases
and sales are executed with the objective of having adequate funds available
to satisfy the Companys liabilities. As the Companys investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy obligations and/or rebalance asset
portfolios. The effective average duration of fixed maturities was 4.0 years
as of September 30, 2004, a 0.6 decrease from 4.6 years as of December 31,
2003. The decrease in effective average duration resulted from the
investment of operating cash flows and investment maturities and sales
proceeds in slightly shorter-term investments. Pursuant to the Agreement and Plan of Merger with COUNTRY, the Company will,
concurrent with the closing of the merger and assuming regulatory and
shareholder approvals and the satisfaction of all other conditions to
closing, be required to pay approximately $6.2 million in order to fund the
settlement of shares of the Companys common stock that will immediately vest
under the Companys Performance Shares Awards Plan and the Companys
Directors Discounted Stock Option Plan. It is unlikely that the Company
will be able to fully fund this payment out of operating cash flow. As a
result, the Company anticipates having to liquidate some fixed maturity
securities in order to pay the amount not covered by operating cash flow. Other than noted above, the Company does not have any debt, lease
obligations, purchase obligations, lines of credit, guarantees, off-balance
sheet arrangements, trading activities involving non-exchange traded
contracts accounted for at fair value or relationships with persons or
entities that derive benefits from a non-independent relationship with the
Company or the Companys related parties. 21




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##### Table of Contents



Investments The following table identifies the invested assets by type held as of
September 30, 2004 and December 31, 2003 (dollars in thousands): September 30, 2004
    
    December 31, 2003Amount
    
    Percent
    
    Amount
    
    PercentFixed maturities held for investment, at cost
    
    $
    849
    
    
    
    0.4
    
    
    $
    3,348
    
    
    
    1.7Fixed maturities available for sale, at fair
value
    
    
    187,912
    
    
    
    91.8
    
    
    
    178,709
    
    
    
    90.4Equity securities, at fair value
    
    
    3,241
    
    
    
    1.6
    
    
    
    3,220
    
    
    
    1.6Mortgage loans, at cost
    
    
    838
    
    
    
    0.4
    
    
    
    1,028
    
    
    
    0.5Policy loans, at outstanding balance
    
    
    11,349
    
    
    
    5.5
    
    
    
    10,707
    
    
    
    5.4Other invested assets
    
    
    582
    
    
    
    0.3
    
    
    
    582
    
    
    
    0.4Total Investments
    
    $
    204,771
    
    
    
    100.0
    
    
    $
    197,594
    
    
    
    100.0
 Since December 31, 2003, there has not been a material change in mix or
credit quality of the Companys investment portfolio. All bond purchases
have been available for sale and approximately 86% of the holdings at
September 30, 2004 and 87% of the holdings at December 31, 2003 are rated A
or better by Standard & Poors Corporation. For all fixed maturities,
approximately 14% in 2004 and 13% in 2003 are rated BBB. Ratings of BBB and
higher are considered investment grade by the rating services. Fluctuations in interest rates affect the Companys return on, and the fair
value of, fixed maturity investments, which comprised approximately 92% of
the fair value of its invested assets as of September 30, 2004 and December
31, 2003. Other events beyond the Companys control could also adversely
impact the fair value of these investments. Specifically, a downgrade of an
issuers credit rating or default of payment by an issuer could reduce the
Companys investment return. The following table indicates by rating the composition of the Companys
fixed maturity securities portfolio at September 30, 2004 and December 31,
2003 (dollars in thousands): September 30, 2004
    
    December 31, 2003Ratings (1)
    
    Carrying Value
    
    Percent
    
    Carrying Value
    
    PercentInvestment grade:U.S. Government and agencies
    
    $
    87,614
    
    
    
    46.4
    
    
    $
    77,011
    
    
    
    42.3AAA
    
    
    10,543
    
    
    
    5.6
    
    
    
    12,016
    
    
    
    6.6AA
    
    
    13,370
    
    
    
    7.1
    
    
    
    18,387
    
    
    
    10.1A
    
    
    50,303
    
    
    
    26.6
    
    
    
    51,158
    
    
    
    28.1BBB
    
    
    26,932
    
    
    
    14.3
    
    
    
    23,485
    
    
    
    12.9Total fixed maturity securities
    
    $
    188,762
    
    
    
    100.0
    
    
    $
    182,057
    
    
    
    100.0
  (1)
    
    Ratings are the lower of those assigned primarily by Standard &
Poors and Moodys, when available, and are shown in the table using
the Standard & Poors rating scale. The Company monitors the financial condition and operations of securities on
which there are concerns regarding credit quality. In evaluating fixed
maturities to determine whether any of the unrealized losses are
other-than-temporary, managements assessments as to the nature of declines
in fair values are based upon historical operating trends, business
prospects, status of the industry in which the Company operates, analyst
ratings on the issuer and sector, the quality of the investments, the
severity and duration of the unrealized losses and the Companys ability or
intent to hold the investments. If fair value is less than the carrying
value and the decline in value is determined to be other-than-temporary, an
appropriate write-down is recorded. 22




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##### Table of Contents



Securities, both fixed maturities and equities, that are depressed by 20% or
more for 12 months or by 30% or more for six months are presumed to be
other-than-temporarily impaired unless the depression is the result of rising
interest rates or significant objective verifiable evidence supports that the
security price is temporarily depressed and is expected to recover within a
reasonable period of time. Securities depressed less than 20% or depressed
20% or more but for less than 12 months or depressed 30% or more but for less
than six months are also reviewed to determine if an other-than-temporary
impairment is present. The primary factors considered in evaluating whether
a decline in value for securities is other-than-temporary include: (a) the
length of time and the extent to which the fair value has been less than
cost, (b) the financial condition, credit rating and near-term prospects of
the issuer, (c) whether the debtor is current on contractually obligated
interest and principal payments and (d) the intent and ability of the Company
to retain the investment for a period of time sufficient to allow for
recovery. At September 30, 2004 the Company held fixed maturity and equity
securities which had been depressed for more than twelve months, but which
the Company does not believe to be other-than-temporarily impaired. Gross
unrealized losses on these securities, which had a carrying value of
approximately $17,481,000, were approximately $431,000. The Companys mortgage loan policy limits the amounts of loans to no more
than 80% of the collateral value on residential loans and no more than 75% of
the collateral value on commercial loans. The Company grants loans only to
employees (excluding officers and directors) and agents. The geographic distribution of the loan portfolio is (dollars in thousands): Number of Loans
    
    
    
    
    
    Book ValueSeptember 30,
    
    December 31,
    
    
    
    
    
    September 30,
    
    December 31,2004
    
    2003
    
    
    
    
    
    2004
    
    20032
    
    
    
    2
    
    
    Alabama
    
    $
    82
    
    
    
    913
    
    
    
    4
    
    
    Florida
    
    
    113
    
    
    
    18021
    
    
    
    23
    
    
    Georgia
    
    
    643
    
    
    
    75726
    
    
    
    29
    
    
    
    
    
    
    $
    838
    
    
    
    1,028
 Four loans representing $83,600 in principal are over 30 days delinquent. The
loan-to-value ratio on delinquent loans is 14%. 23




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys primary objectives in managing its cash flow and investments are
to maximize investment income and yield while preserving capital and minimizing
credit risks. To attain these objectives, investment policies and strategies
are developed using expected underwriting results, forecasted federal tax
positions, regulatory requirements, forecasted economic conditions including
expected fluctuations in interest rates, and general market risks. Market Risk. Market risk represents the potential for loss due to adverse
changes in the fair market value of financial instruments. The market risks
associated with the financial instruments of the Company primarily relate to
the Companys investment portfolio that consists largely (92%) of fixed
maturity securities. The Companys investment portfolio is exposed to market
risk through fluctuations in interest rates, changes in credit quality and
principal prepayments. Interest Rate Risk. Interest rate risk is the price sensitivity of a fixed
maturity security to changes in interest rates. The Company manages its
exposure to interest rate risk through multi-scenario cash flow projection
models that forecast cash flows of the liabilities and their supporting
investments. Cash flows from corporate obligations are assumed to be
consistent with the contractual payment streams on a yield to worst basis. The
primary assumptions used in calculating cash flow projections include expected
asset payment streams, taking into account prepayment speeds, issuer call
options, and contract holder behavior. Asset-backed securities, collateralized
mortgage obligations, and mortgage-backed securities are modeled based on
estimates of the rate of future prepayments of principal over the remaining
life of the securities. These estimates are developed using prepayment speeds
provided in broker consensus data. Actual prepayment experience may vary from
these estimates. Through cash flow testing and managing portfolio duration
through proactive discussions with the Companys outside investment advisors,
the Company believes that interest rate risk is mitigated. Credit Risk. The Company invests primarily in fixed maturity securities of the
U.S. government and its related agencies, investment grade fixed maturity
corporate securities and mortgage-backed securities. (See Item 2 -
Managements Discussion and Analysis of Consolidated Financial Condition and
Results of Operations.) All of the Companys fixed maturity portfolio market
value is comprised of investment grade securities. The Companys investment
policy requires all of the Companys fixed maturity securities to be invested
in investment grade securities. Due to the overall high quality of the
Companys investment portfolio (100% investment grade), management believes the
Company has marginal risk with regard to credit quality. Prepayment Risk. Mortgage-backed securities investors are compensated
primarily for prepayment risk rather than credit quality risk. Mortgage-backed
securities are subject to risks associated with variable pre-payments which may
result in these securities having a different actual cash flow and maturity
than expected at the time of purchase. Securities that have an amortized cost
greater than par and are backed by mortgages that prepay faster than expected
will incur a reduction in yield or a loss. Those securities with an amortized
cost lower than par that prepay faster than expected will generate an increase
in yield or a gain. In addition, the Company may incur reinvestment risks if
market yields are lower than the book yields earned on the securities.
Prepayments occurring slower than expected have the opposite impact. The
Company may incur disinvestment risks if market yields are higher than the book
yields earned on the securities and the Company is forced to sell the
securities. The degree to which a security is susceptible to either gains or
losses is influenced by (a) the difference between its amortized cost and par,
(b) the relative sensitivity of the underlying mortgages backing the assets to
prepayment in a changing interest rate environment and (c) the repayment
priority of the securities in the overall securitization structure. To manage
prepayment risk, the Company limits the type of mortgage-backed structures in
which it invests and restricts the portfolios total exposure in
mortgage-backed securities. Mortgage-backed securities comprised approximately
16% and 22% of the Companys fixed maturity portfolio at September 30, 2004 and
December 31, 2003, respectively. There are negligible default risks in the
mortgage-backed securities portfolio as a whole as the vast majority of the
assets are either guaranteed by U.S. government-sponsored entities or are
supported in the securitization structure by junior securities enabling the
assets to achieve high investment grade status. 24




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##### Table of Contents



Sensitivity Analysis. The Company regularly conducts various analyses to gauge
the financial impact of changes in interest rate on its financial condition.
The ranges selected in these analyses reflect managements assessment as being
reasonably possible over the succeeding twelve-month period. The magnitude of
changes modeled in the accompanying analyses should, in no manner, be construed
as a prediction of future economic events, but rather be treated as a simple
illustration of the potential impact of such events on the Companys financial
results. Estimated Fair Value
    
    Hypothetical PercentageEstimated Change
    
    After Hypothetical
    
    Increase (Decrease) InEstimated Value
    
    in Interest Rates
    
    Change in Interest
    
    Shareholders EquitySeptember 30, 2004
    
    (bp-Basis Points)
    
    Rates
    
    (based on pre-tax amounts)(dollars in thousands)Fixed Maturities  Held
for Investment
    
    $
    883
    
    
    200 bp decrease
    
    $
    902
    
    
    
    N/A100 bp decrease
    
    
    893
    
    
    
    N/A100 bp increase
    
    
    873
    
    
    
    N/A200 bp increase
    
    
    864
    
    
    
    N/AFixed Maturities  Available
    
    $
    187,913
    
    
    200 bp decrease
    
    $
    202,556
    
    
    
    16.4
    %for Sale
    
    
    
    
    
    100 bp decrease
    
    
    195,318
    
    
    
    8.3
    %100 bp increase
    
    
    180,176
    
    
    
    (8.7
    %)200 bp increase
    
    
    172,440
    
    
    
    (17.4
    %)
 
 ITEM 4. CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Accounting Officer of the Company
evaluated the effectiveness of our disclosure controls and procedures (as
defined in SEC Rule 13a  15(e)) as of September 30, 2004. Based on that
evaluation, the Chief Executive Officer and Chief Accounting Officer have
concluded that our disclosure controls and procedures are effective. During the nine months ended September 30, 2004, there was no change in our
internal control over financial reporting (as defined in Rule 13a  15f) that
has materially affected, or is reasonably likely to materially effect, our
internal control over financial reporting. 25




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings The Company is a defendant in various actions incidental to the conduct of its
business. While the ultimate outcome of these matters cannot be estimated with
certainty, management does not believe the actions are reasonably likely to
result in a material loss to the Company. The Company has reached a partial settlement regarding $900,000 in reinsurance
coverage. In addition, a lawsuit was initiated by the Company in the third
quarter of 2001. To date the Company has received approximately $475,000 and
continues to seek additional recoveries against the reinsurance brokers through
already existing legal channels. During the fourth quarter of 2003 the Company
determined it to be probable that approximately $200,000 of the outstanding
balance would be uncollectible and reduced the receivable by that amount. The
Company believes the remaining $193,000 outstanding to be fully recoverable and
has included it in reinsurance receivable on the consolidated condensed balance
sheet. 
 Item 2. Changes in Securities and Use of Proceeds NONE 
 Item 3. Defaults Upon Senior Securities NONE 
 Item 4. Submission of Matters to a Vote of Security Holders On September 27, 2004, the Company submitted the matter of the proposed merger
with COUNTRY for a vote by shareholders that was held at the Special Meeting
of Shareholders on October 25, 2004. At that meeting, the proposed merger
with COUNTRY was approved by a majority of shareholders entitled to vote. 
 Item 5. Other Information NONE 
 Item 6. Exhibits and Reports on Form 8-K The Company furnished a report on Form 8-K on August 17, 2004 pursuant to
Item 12 of Form 8-K, Disclosure of Results of Operations and Financial
Condition as directed by the Securities and Exchange Commission in Release
23-47583. The Company furnished a report on Form 8-K on September 28, 2004 pursuant to
Item 1 of Form 8-K, Entry into a Material Definitive Agreement as directed
by the Securities and Exchange Commission. The Company furnished a report on Form 8-K on October 20, 2004 pursuant to
Item 7 of Form 8-K, Regulation FD Disclosure as directed by the Securities
and Exchange Commission. The Company furnished a report on Form 8-K on October 26, 2004 pursuant to
Item 7 of Form 8-K, Regulation FD Disclosure as directed by the Securities
and Exchange Commission. The Company furnished a report on Form 8-K on November 8, 2004 pursuant to
Item 12 of Form 8-K, Disclosure of Results of Operations and Financial
Condition as directed by the Securities and Exchange Commission in Release
23-47583. 26




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##### Table of Contents



Exhibit 11  Statement re: Computation of Per Share Earnings Exhibit 15  Letter Regarding Unaudited Interim Financial Information Exhibits 31.1
    
    Certification of the Companys Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Companys Vice President of Finance
and Assistant Treasurer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Companys Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Companys Vice President of Finance
and Assistant Treasurer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. COTTON STATES LIFE INSURANCE COMPANY
Registrant/s/J. Ridley HowardDate: November 11, 2004
    
    J. Ridley Howard
President and Chief Executive Officer/s/ William J. BarlowDate: November 11, 2004
    
    William J. Barlow
Vice President of Finance and Assistant Treasurer
 27