##### 



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, 2003

Commission File Number 2-39729

COTTON STATES LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)


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.

YESx  NOo

Indicate by check mark whether the registrant is an accelerated Filer (as
defined in Rule 126.2 of the Exchange Act).

YESo  NOx

The Registrant as of September 30, 2003, 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, 2003

INDEX

PagePART 1 - FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsIndependent Accountants Review Report
    
    
    1Consolidated Condensed Balance Sheets as of
September 30, 2003 and December 31, 2002
    
    
    2Consolidated Condensed Statements of Earnings for the
Three Months and Nine months ended September 30, 2003 and 2002
    
    
    3Consolidated Condensed Statements of Cash Flows for the
Nine months ended September 30, 2003 and 2002
    
    
    4Consolidated Condensed Statements of Comprehensive Income
for the Three Months and Nine months ended September 30, 2003 and 2002
    
    
    5Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Consolidated Condensed Financial
Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    20Item 3.
    
    Defaults Upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    20Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    20SIGNATURES
    
    
    21






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##### 



INDEPENDENT ACCOUNTANTS REVIEW REPORT

To the Board of Directors and Shareholders of
Cotton States Life Insurance Company:

We have reviewed the accompanying consolidated condensed balance sheet of
Cotton States Life Insurance Company and subsidiaries as of September 30, 2003,
and the related consolidated condensed statements of earnings and comprehensive
income for the three-month periods ended September 30, 2003 and 2002 and
nine-month period ended September 30, 2003 and the consolidated condensed
statement of cash flows for the nine-month period ended September 30, 2003. These financial statements are the responsibility of the Companys
management. The consolidated condensed balance sheet as of June 30, 2002, and
the related consolidated condensed statement of earnings, comprehensive income
and cash flows for the six-month period ended June 30, 2002 were reviewed by
other accountants whose report (dated August 6, 2002) stated that they were not
aware of any material modifications that should be made to those statements for
them to be in conformity with accounting principles generally accepted in the
United States.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing 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 accompanying consolidated condensed financial statements
at September 30, 2003, and for the three-month and nine-month periods ended
September 30, 2003 and the three-month period ended September 30, 2002 for them
to be in conformity with accounting principles generally accepted in the United
States.

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Cotton States
Life Insurance Company and subsidiaries as of December 31, 2002, and the
related consolidated statements of earnings, comprehensive income and cash
flows for the year then ended and in our report dated February 25, 2003, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated
condensed balance sheet as of December 31, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

Ernst & Young LLP

Atlanta, Georgia
November 10, 2003

1



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##### 



COTTON STATES LIFE INSURANCE COMPANY

ITEM I. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Consolidated Condensed Balance Sheets

September 30,
    
    December 31,2003
    
    2002(unaudited)ASSETSInvestments:Fixed maturities, held for investment, at amortized
cost (fair value of $3,511,979 in 2003 and $7,324,373 in 2002)
    
    $
    3,348,142
    
    
    
    7,048,175Fixed maturities, available for sale, at fair value (amortized
cost of $173,137,829 in 2003 and $146,159,339 in 2002)
    
    
    179,623,745
    
    
    
    152,307,406Equity securities, at fair value (cost of $2,709,852 in 2003
and $2,984,720 in 2002)
    
    
    2,865,218
    
    
    
    2,519,895First mortgage loans on real estate
    
    
    1,080,546
    
    
    
    1,320,330Policy loans
    
    
    10,493,564
    
    
    
    10,425,612Other invested assets
    
    
    582,000
    
    
    
    582,000Total investments
    
    
    197,993,215
    
    
    
    174,203,418Cash and cash equivalents
    
    
    7,439,632
    
    
    
    18,913,861Accrued investment income
    
    
    2,166,332
    
    
    
    2,406,298Amounts receivable, principally premiums
    
    
    4,394,170
    
    
    
    3,777,671Amount due from reinsurers
    
    
    4,243,011
    
    
    
    4,263,828Deferred policy acquisition costs
    
    
    62,305,571
    
    
    
    57,686,410Federal income tax receivable
    
    
    201,291
    
    
    
    98,457Other assets
    
    
    373,051
    
    
    
    460,061$
    279,116,273
    
    
    
    261,810,004LIABILITIES AND SHAREHOLDERS EQUITYPolicy liabilities and accruals:Future policy benefits
    
    $
    171,304,812
    
    
    
    160,424,107Policy claims and benefits payable
    
    
    2,659,654
    
    
    
    3,241,343Total policy liabilities and accruals
    
    
    173,964,466
    
    
    
    163,665,450Federal income taxes:Current
    
    
    
    
    
    
    Deferred
    
    
    12,368,518
    
    
    
    11,181,184Other liabilities
    
    
    6,099,167
    
    
    
    5,592,961Total liabilities
    
    
    192,432,151
    
    
    
    180,439,595Shareholders equity:Common stock of $1 par value. Authorized 20,000,000 shares;
issued: 6,987,331 shares in 2003 and 6,929,347 shares in 2002;
outstanding: 6,322,737 shares in 2003 and 6,328,737 shares in 2002;
restricted: 232,827 shares in 2003 and 174,843 shares in 2002
    
    
    6,987,331
    
    
    
    6,929,347Additional paid-in capital
    
    
    3,954,669
    
    
    
    3,434,018Accumulated other comprehensive income, net of tax
    
    
    3,940,935
    
    
    
    3,226,975Retained earnings
    
    
    76,288,031
    
    
    
    72,035,550Less:Unearned compensation  restricted stock
    
    
    (938,780
    )
    
    
    (764,543
    )Treasury stock, at cost (431,767 shares in 2003 and
425,767 shares in 2002)
    
    
    (3,548,064
    )
    
    
    (3,490,938
    )Total shareholders equity
    
    
    86,684,122
    
    
    
    81,370,409$
    279,116,273
    
    
    
    261,810,004


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, 2003 and 2002

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Revenue:Premiums
    
    $
    8,776,978
    
    
    
    8,060,634
    
    
    
    25,799,984
    
    
    
    23,734,944Investment income
    
    
    2,224,128
    
    
    
    2,642,930
    
    
    
    6,680,796
    
    
    
    7,541,903Realized investment gains
    
    
    253,397
    
    
    
    385,106
    
    
    
    1,489,296
    
    
    
    493,257Brokerage commissions
    
    
    1,211,349
    
    
    
    1,204,326
    
    
    
    3,408,974
    
    
    
    3,337,429Total revenue
    
    
    12,465,852
    
    
    
    12,292,996
    
    
    
    37,379,050
    
    
    
    35,107,533Benefits and expenses:Benefits and claims
    
    
    5,083,393
    
    
    
    5,091,847
    
    
    
    15,376,111
    
    
    
    14,076,802Interest credited
    
    
    1,497,835
    
    
    
    1,498,770
    
    
    
    4,466,267
    
    
    
    4,461,837Amortization of policy acquisition costs
    
    
    1,428,323
    
    
    
    652,203
    
    
    
    3,736,014
    
    
    
    2,582,937Operating expenses
    
    
    1,788,813
    
    
    
    2,213,285
    
    
    
    6,563,369
    
    
    
    6,635,810Total benefits and expense
    
    
    9,798,364
    
    
    
    9,456,105
    
    
    
    30,141,761
    
    
    
    27,757,386Income before income tax expense
    
    
    2,667,488
    
    
    
    2,836,891
    
    
    
    7,237,289
    
    
    
    7,350,147Income tax expense
    
    
    782,614
    
    
    
    814,817
    
    
    
    2,219,827
    
    
    
    2,103,187Net income
    
    $
    1,884,874
    
    
    
    2,022,074
    
    
    
    5,017,462
    
    
    
    5,246,960Basic income per share of common stock
    
    $
    0.30
    
    
    
    0.32
    
    
    
    0.79
    
    
    
    0.83Diluted income per share of common stock
    
    $
    0.29
    
    
    
    0.31
    
    
    
    0.76
    
    
    
    0.81Weighted average number of shares
used in computing income per shareBasic
    
    
    6,323,737
    
    
    
    6,339,837
    
    
    
    6,323,792
    
    
    
    6,338,426Diluted
    
    
    6,617,889
    
    
    
    6,495,878
    
    
    
    6,616,595
    
    
    
    6,495,919Dividends paid per share
    
    $
    0.04
    
    
    
    0.04
    
    
    
    0.12
    
    
    
    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, 2003 and 2002

Nine months endedSeptember 30,2003
    
    2002Cash flows from operating activities:Net income
    
    $
    5,017,462
    
    
    
    5,246,960Adjustments to reconcile net income to net
cash provided from operating activities:Realized investment gains
    
    
    (1,489,296
    )
    
    
    (493,257
    )Increase in policy liabilities and accruals
    
    
    10,299,016
    
    
    
    11,713,106(Increase) in deferred policy acquisition costs
    
    
    (4,537,507
    )
    
    
    (5,079,168
    )Increase in liability for income taxes
    
    
    758,766
    
    
    
    678,188(Increase) in amounts receivable and
amounts due from reinsurers
    
    
    (595,682
    )
    
    
    (138,404
    )Increase (decrease) in amounts due affiliate
    
    
    419,879
    
    
    
    (338,121
    )Other, net
    
    
    1,605,541
    
    
    
    397,496Net cash provided from operating activities
    
    
    11,478,179
    
    
    
    11,986,800Cash flows from investing activities:Purchase of fixed maturities available for sale
    
    
    (104,939,624
    )
    
    
    (79,207,253
    )Purchase of equity securities
    
    
    (592,550
    )
    
    
    (1,256,257
    )Sale of fixed maturities held for investment
    
    
    
    
    
    
    450,000Sale of fixed maturities available for sale
    
    
    55,613,923
    
    
    
    56,277,521Sale of equity securities
    
    
    570,581
    
    
    
    1,444,863Proceeds from maturities of fixed
maturities held for investment
    
    
    3,700,000
    
    
    
    2,000,000Proceeds from maturity and redemption of fixed
maturities held for sale
    
    
    23,361,386
    
    
    
    9,322,348Principal collected on first mortgage loans
    
    
    239,784
    
    
    
    386,629Net increase in policy loans
    
    
    (67,952
    )
    
    
    (590,456
    )Other, net
    
    
    (15,850
    )
    
    
    (84,265
    )Net cash used in investing activities
    
    
    (22,130,302
    )
    
    
    (11,256,870
    )Cash flows from financing activities:Cash dividends paid
    
    
    (764,980
    )
    
    
    (764,980
    )Purchase of treasury stock
    
    
    (57,126
    )
    
    
    (10,453
    )Stock issued under executive compensation plans
    
    
    
    
    
    
    65,232Net cash used by financing activities
    
    
    (822,106
    )
    
    
    (710,201
    )Net (decrease) increase in cash and cash equivalents:
    
    
    (11,474,229
    )
    
    
    19,729Cash and cash equivalents:Beginning of period
    
    
    18,913,861
    
    
    
    13,187,601End of period
    
    $
    7,439,632
    
    
    
    13,207,330


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, 2003 and 2002

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income
    
    $
    1,884,874
    
    
    
    2,022,074
    
    
    
    5,017,462
    
    
    
    5,246,960Other comprehensive income (loss),
before tax:Change in fair value of securities
available for sale
    
    
    (1,688,169
    )
    
    
    4,678,011
    
    
    
    2,528,990
    
    
    
    4,707,457Reclassification adjustment for realized
(gains) losses included in net income
    
    
    (253,397
    )
    
    
    (385,106
    )
    
    
    (1,489,296
    )
    
    
    (493,257
    )Total other comprehensive income
before tax
    
    
    (1,941,566
    )
    
    
    4,292,905
    
    
    
    1,039,694
    
    
    
    4,214,200Income tax expense related to
items of other comprehensive income
    
    
    (687,894
    )
    
    
    1,589,258
    
    
    
    325,734
    
    
    
    1,593,358Other comprehensive income
net of tax
    
    
    (1,253,672
    )
    
    
    2,703,647
    
    
    
    713,960
    
    
    
    2,620,842Total comprehensive income
    
    $
    631,202
    
    
    
    4,725,721
    
    
    
    5,731,422
    
    
    
    7,867,802


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
September 30, 2003

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, 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, 2002.

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, $404,000 and $229,000 in compensation
expense was recorded in the nine months ended September 30, 2003 and 2002,
respectively, for the various stock option and restricted stock awards granted.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options and restricted stock awards under 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 endedSeptember 30,2003
    
    2002Net income:As reported
    
    $
    1,884,874
    
    
    
    2,022,074Pro forma
    
    $
    1,869,488
    
    
    
    2,006,688Basic net income per share:As reported
    
    $
    0.30
    
    
    
    0.32Pro forma
    
    $
    0.30
    
    
    
    0.32Diluted net income per share:As reported
    
    $
    0.29
    
    
    
    0.31Pro forma
    
    $
    0.28
    
    
    
    0.31


6



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Notes to Unaudited Condensed Consolidated Financial Statements
(continued)

Nine months endedSeptember 30,2003
    
    2002Net income:As reported
    
    $
    5,017,462
    
    
    
    5,246,960Pro forma
    
    $
    4,971,304
    
    
    
    5,200,802Basic net income per share:As reported
    
    $
    0.79
    
    
    
    0.83Pro forma
    
    $
    0.79
    
    
    
    0.82Diluted net income per share:As reported
    
    $
    0.76
    
    
    
    0.81Pro forma
    
    $
    0.75
    
    
    
    0.80


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 and 2002; expected dividend yield of 1.67% for 2003 and 2002
grants; risk-free interest rate of 3.5% for 2003 and 2002; and an expected
volatility of 66% for 2003 grants and 2002 grants.

Note 3  Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148
Accounting for Stock Based Compensation  Transition and Disclosure, which is
effective for financial statements issued after December 15, 2002. The
adoption of SFAS No. 148 did not affect the Companys results of operations or
financial position. The Company has complied with the disclosure requirements
of SFAS No. 148 in these condensed consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must generally be applied for the
first interim or annual period beginning after June 15, 2003. There is no
impact on the Companys financial position or results of operations for 2003
under FIN 46. The Company also expects no impact in future periods under FIN
46.


7

Notes to Unaudited Condensed Consolidated Financial Statements
(continued)

Note 4  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 state
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.

Total revenue and net income by business segment are as follows:

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Dollars in thousands)
    
    (Dollars in thousands)2003
    
    2002
    
    2003
    2002Individual life insurance:Premiums
    
    $
    5,130
    
    
    
    4,941
    
    
    
    15,190
    
    
    
    14,512Investment income
    
    
    1,959
    
    
    
    2,377
    
    
    
    5,916
    
    
    
    6,816Realized investment gains (losses)
    
    
    221
    
    
    
    348
    
    
    
    1,319
    
    
    
    446Total revenue
    
    $
    7,310
    
    
    
    7,666
    
    
    
    22,425
    
    
    
    21,774Net income
    
    $
    1,100
    
    
    
    1,355
    
    
    
    3,157
    
    
    
    3,418Guaranteed and simplified issue life
insurance:Premiums
    
    $
    3,647
    
    
    
    3,120
    
    
    
    10,610
    
    
    
    9,223Investment income
    
    
    263
    
    
    
    261
    
    
    
    759
    
    
    
    711Realized investment gains (losses)
    
    
    32
    
    
    
    37
    
    
    
    170
    
    
    
    47Total revenue
    
    $
    3,942
    
    
    
    3,418
    
    
    
    11,539
    
    
    
    9,981Net income
    
    $
    61
    
    
    
    51
    
    
    
    87
    
    
    
    177Brokerage:Commission income
    
    $
    1,211
    
    
    
    1,204
    
    
    
    3,409
    
    
    
    3,337Investment income
    
    
    3
    
    
    
    5
    
    
    
    6
    
    
    
    15Total revenue
    
    $
    1,214
    
    
    
    1,209
    
    
    
    3,415
    
    
    
    3,352Net income
    
    $
    724
    
    
    
    616
    
    
    
    1,773
    
    
    
    1,652Total revenue
    
    $
    12,466
    
    
    
    12,293
    
    
    
    37,379
    
    
    
    35,107Total net income
    
    $
    1,885
    
    
    
    2,022
    
    
    
    5,017
    
    
    
    5,247


8



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##### 



Notes to Unaudited Condensed Consolidated Financial Statements
(continued)

Note 5  Legal Proceedings

The Company is a defendant in various actions incidental to the conduct of its
business. The Company intends to vigorously defend the litigation and while
the ultimate outcome of these matters cannot be estimated with certainty,
management does not believe the actions will result in any material loss to the
Company.

The Company has reached partial settlement regarding $900,000 in reinsurance
coverage. A lawsuit was initiated by the Company in the third quarter 2001.
To date, the Company has received $475,000 and continues to seek additional
recoveries against reinsurance brokers through already existing legal channels.
The remaining amount outstanding is included in Amounts due from reinsurers
on the consolidated condensed balance sheet.

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.

Note 7  Treasury Stock

During the nine months ended September 30, 2003 the Company purchased 6,000
shares of its common stock, which is held in treasury. For the same period,
the Company issued no shares of common stock out of treasury for its restricted
stock performance award program.

There were no changes in the Companys capital structure for the nine months
ended September 30, 2003.

Note 8  Subsequent Events

On November 10, 2003 the Cotton States Insurance Group (consisting of the
Company, Cotton States Mutual Insurance Company, and Shield Insurance Company)
announced that it had entered into a letter agreement outlining the terms of a
potential transaction with COUNTRY Insurance & Financial Services (COUNTRY).
Pursuant to the letter agreement, it is anticipated that COUNTRY will purchase
all of the outstanding capital stock of the Company.

9



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##### 



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF CONSOLIDATED CONDENSED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements made in the following discussion that state the Companys or
managements intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Companys
beliefs concerning future levels of sales and redemption of the Companys
products, investment spreads and yields, the earnings and profitability of the
Companys activities, and the sufficiency of the Companys cash flows for
liquidity purposes.

Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Companys control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or
not actual results differ materially from forward-looking statements may depend
on numerous foreseeable and unforeseeable developments. Some may be national
in scope, such as general economic conditions, changes in tax law and changes
in interest rates. Some may be related to the insurance industry generally,
such as pricing competition, regulatory developments and industry
consolidation. Others may relate to the Company specifically, such as credit,
volatility and other risks associated with the Companys investment portfolio.
Investors are also directed to consider other risks and uncertainties
discussed in Form 10-K filed by the Company with the Securities and Exchange
Commission. If the Companys assumptions and estimates are incorrect or do
not come to fruition, or if the Company does not achieve all of these key
factors, then the Companys actual performance could differ materially from the
forward-looking statements made herein. The Company disclaims any obligation
to update forward-looking information.

Results of Operations

Three Months EndedSeptember 30,(Dollars in thousands)IncreasePremiums
    
    2003
    
    2002
    
    (Decrease)Guaranteed and simplified
issue life insurance
    
    $
    3,647
    
    
    
    3,120
    
    
    
    17
    %Individual life insurance:Traditional life
    
    
    1,734
    
    
    
    1,800
    
    
    
    (4
    %)Universal life
    
    
    3,396
    
    
    
    3,141
    
    
    
    8
    %Total individual life insurance
    
    
    5,130
    
    
    
    4,941
    
    
    
    4
    %Total premiums
    
    $
    8,777
    
    
    
    8,061
    
    
    
    9
    %


10



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##### 



Nine months endedSeptember 30,(Dollars in thousands)Premiums
    
    2003
    
    2002
    
    IncreaseGuaranteed and simplified
issue life insurance
    
    $
    10,610
    
    
    
    9,223
    
    
    
    15
    %Individual life insurance:Traditional life
    
    
    5,229
    
    
    
    5,167
    
    
    
    1
    %Universal life
    
    
    9,961
    
    
    
    9,345
    
    
    
    7
    %Total individual life insurance
    
    
    15,190
    
    
    
    14,512
    
    
    
    5
    %Total premiums
    
    $
    25,800
    
    
    
    23,735
    
    
    
    9
    %


Guaranteed and simplified issue life insurance premiums continued to show
strong growth as a result of higher production by the independent agency force
which had approximately 4,600 and 4,200 agents under contract at September 30,
2003 and 2002, respectively. 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 universal life products. The Company had 257 exclusive
agents under contract at September 30, 2003.

The rate of increases in premium growth has slowed during 2003 which the
Company believes to be caused by a weakened economy, unemployment rates and the
resulting alternative uses of potential customers resources.

Investment Income and Realized Gains and Losses

Investment income decreased 16% for the third quarter of fiscal year 2003 as
compared to a 2% decrease in the third quarter of fiscal year 2002. For the
first nine months of 2003, investment income decreased 11% compared to a 3%
decrease for the same period of fiscal year 2002. This decrease was primarily
a result of a decrease in the annualized average yield to 4.8% compared to 6.0%
for the first nine months of 2002, which occurred as a result of continued
pressure on lower interest rates.

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.

During the second quarter of 2002 the Company realized an investment loss of
$850,000 from a write-down of the carrying value on a Worldcom, Inc. debt
security. This write-down was the result of the Company determining that an
other-than-temporary impairment had occurred on the security. This debt
security was subsequently disposed of in the third quarter of 2002 at an
additional loss of $41,000.

During the third quarter of 2002 the Company realized a pre-tax investment loss
of $120,000 from the write-down of the carrying value of Intel common stock.
This write-down was the result of the Company determining that an
other-than-temporary impairment had occurred.


11The 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, 2003 there were no
debt or equity securities whose unrealized losses would be deemed to be
other-than-temporary impairments.Brokerage CommissionsExclusive agents also sell products that the Cotton States Group does not
underwrite (both life and property and casualty). Property and casualty
business lines, principally non-standard auto, continue to show growth with
commissions increasing 2% for the first nine months of 2003 compared to the
first nine months of 2002 and met management expectations for the quarter.
This was attributable to an increase in override commissions from several
property and casualty carriers writing various lines of business, partially
offset by lower than expected overrides from one non-standard auto carrier.
Brokerage commissions for the quarter were flat compared to the same period of
2002 due to lower than expected overrides from one non-standard auto carrier.Benefits and ClaimsLife benefits and claims, including reserve increases on traditional life and
guaranteed and simplified issue products are as follows:Three Months EndedSeptember 30,(Dollars in Thousands)2003
    
    2002Benefits
    
    % of
    
    Benefits
    
    % ofBenefits and Claims
    
    and Claims
    
    Premium
    
    and Claims
    
    PremiumGuaranteed and
simplified issue
    
    $
    2,841
    
    
    
    78
    %
    
    
    2,421
    
    
    
    78
    %Individual life insuranceTraditional life
    
    
    1,326
    
    
    
    76
    %
    
    
    1,298
    
    
    
    72
    %Universal life
    
    
    916
    
    
    
    27
    %
    
    
    1,373
    
    
    
    44
    %Total individual life insurance
    
    
    2,242
    
    
    
    44
    %
    
    
    2,671
    
    
    
    54
    %Total benefits and claims
    
    $
    5,083
    
    
    
    58
    %
    
    
    5,092
    
    
    
    63
    %



12Nine months endedSeptember 30,(Dollars in Thousands)2003
    
    2002Benefits
    
    % of
    
    Benefits
    
    % ofBenefits and Claims
    
    and Claims
    
    Premium
    
    and Claims
    
    PremiumGuaranteed and
simplified issue
    
    $
    8,486
    
    
    
    80
    %
    
    
    7,012
    
    
    
    76
    %Individual life insuranceTraditional life
    
    
    3,803
    
    
    
    73
    %
    
    
    3,571
    
    
    
    69
    %Universal life
    
    
    3,087
    
    
    
    31
    %
    
    
    3,494
    
    
    
    37
    %Total individual life insurance
    
    
    6,890
    
    
    
    45
    %
    
    
    7,065
    
    
    
    49
    %Total benefits and claims
    
    $
    15,376
    
    
    
    60
    %
    
    
    14,077
    
    
    
    59
    %

Benefits and claims as a percentage of premium fluctuate within a normal range
reflecting volatility in mortality, changes in mix of business, and age of
policyholders. Guaranteed and simplified issue experience in 2003 was slightly
higher than Company expectations but due to the Companys size fluctuations can
and do occur in any particular quarter. Universal life experience in the
quarter ended September 30, 2003 reflects better than expected results in the
Companys payroll deduction product. Year-to-date claims as a percentage of
premiums were flat compared to 2002. Overall benefits and claims were within
managements expectation. 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.Interest Credited to PolicyholdersInterest credited to universal life contracts was flat for both the first nine
months of 2003 compared to 2002 and for the quarter ended September 30, 2003 as
compared to the same quarter in 2002. The annual interest rate credited to
universal life contract accumulations was 5.75% for the first two months of
2003. Effective March 1, 2003 the annual interest rate credited to
policyholders was changed to 5.4%. The annual interest rate credited was 6.25%
for the nine month period ended September 30, 2002.Amortization of Policy Acquisition Costs and Operating ExpensesThe amortization of policy acquisition costs as a percentage of premiums was
14% for the nine months ended September 30, 2003 compared to 11% for the same
period of 2002. 2003 results are within the Companys expected range of
12-14%. Amortization for the first nine months of 2002 and for the quarter
ended September 30, 2002 reflects better than expected mortality in the
universal life line of business and a decrease in the annual interest rate
credited to policyholders.Operating expenses as a percentage of premiums were 20% for the third quarter
of 2003 compared to 27% in the same period of 2002. For the nine months ended
September 30, 2003 the percentage was 25% compared to 28% in the same period of
2002. Operating expenses in the third quarter of 2003 include reductions in
certain management compensation programs. The Companys expectations for the
fiscal year 2003 are between 28-31%.13Income Tax ExpenseThe effective tax rate for the first nine months of 2003 was 31% compared to
29% for the same period last year. The effective tax rate increased due to the
effects of the estimated phase out of the small life company deduction. The
effective rate reflects the Companys best estimate of the annual effective
rate.Net IncomeThree Months EndedSeptember 30,(Dollars in thousands)IncreaseNet Income
    
    2003
    
    2002
    
    (Decrease)Guaranteed and simplified issue
    
    $
    61
    
    
    
    51
    
    
    
    20
    %Individual life insurance:Traditional
    
    
    269
    
    
    
    412
    
    
    
    (35
    %)Universal life
    
    
    831
    
    
    
    943
    
    
    
    (12
    %)Total individual life insurance
    
    
    1,100
    
    
    
    1,355
    
    
    
    (19
    %)Brokerage operations
    
    
    724
    
    
    
    616
    
    
    
    18
    %Net Income
    
    $
    1,885
    
    
    
    2,022
    
    
    
    (7
    %)

Nine Months EndedSeptember 30,(Dollars in thousands)IncreaseNet Income
    
    2003
    
    2002
    
    (Decrease)Guaranteed and simplified issue
    
    $
    87
    
    
    
    177
    
    
    
    (51
    %)Individual life insurance:Traditional
    
    
    843
    
    
    
    1,127
    
    
    
    (25
    %)Universal life
    
    
    2,314
    
    
    
    2,291
    
    
    
    1
    %Total individual life insurance
    
    
    3,157
    
    
    
    3,418
    
    
    
    (8
    %)Brokerage operations
    
    
    1,773
    
    
    
    1,652
    
    
    
    7
    %Net Income
    
    $
    5,017
    
    
    
    5,247
    
    
    
    (4
    %)

Net income for the quarter and nine months decreased compared to the prior
periods primarily due to lower than expected sales believed to be caused by a
continued weakened economy, and slightly lower investment income due to
continued uncertainty with interest rates. These were partially offset by
positive contributions by the Companys subsidiaries and benefits and claim
costs that, although slightly higher were within managements expectations.14Critical Accounting PoliciesThe accounting policies described below are those the Company considers
critical in preparing its consolidated financial statements. These polices
include significant estimates made by management using information available at
the time the estimates are made. However, as described below, these estimates
could change materially if different information or assumptions were used.Insurance Related Assets and LiabilitiesThe Company establishes an insurance related asset for deferred policy
acquisition costs, and insurance related liabilities for future policy benefits
and claims relating to its insurance policies under contract. Such assets and
liabilities are developed using actuarial principles and assumptions which
consider a number of factors, including: investment yields, withdrawal rates,
mortality and morbidity. The Company accounts for its traditional individual
life insurance policies using a net level premium method and assumptions as to
the factors enumerated above. Generally, the Companys earnings in any given
calendar year will not be impacted by differences in emerging experience on its
traditional individual business unless such differences are severe enough to
call into question the profitability of the entire block of traditional life
business.The Company does, however, experience fluctuations in its earnings as a result
of current mortality experience differing from that expected in any given year.
For the nine months ended September 30, 2003 and 2002, the Company
experienced emerged mortality of 99% and 90% of amounts expected, respectively,
related to its traditional individual life insurance business. The Company
routinely purchases annual aggregate stop loss reinsurance coverage which
limits experience to 120% of expected mortality in any one year.The Company accounts for its interest-sensitive and universal life insurance
polices and annuities under the provisions of 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. SFAS No. 97 requires
the remeasurement of the Companys deferred acquisition costs each period in a
manner that amortizes such deferred costs as a level percentage of actual
emerged profit over the expected gross profits.Each period, the Company estimates the relevant factors, based primarily on its
emerging experience, and uses this information to determine the assumptions
underlying its asset and liability calculations. An extensive degree of
judgment is used in this estimation process.Any adjustments required to properly state insurance assets and liabilities are
charged or credited to benefit expense in the period in which the need for the
adjustment becomes known.Accounting for Income TaxesThe 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.15Income 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 PronouncementsIn December 2002, the Financial Accounting Standards Board issued SFAS No. 148
Accounting for Stock Based Compensation  Transition and Disclosure, which is
effective for financial statements issued after December 15, 2002. The
adoption of SFAS No. 148 did not affect the Companys results of operations or
financial position. The Company has complied with the disclosure requirements
of SFAS No. 148 in these condensed consolidated financial statements.In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must generally be applied for the
first interim or annual period beginning after June 15, 2003. There is no
impact on the Companys financial position or results of operations for 2003
under FIN 46. The Company also expects no impact in future periods under FIN
46.Liquidity and Capital ResourcesCash FlowAs of September 30, 2003 the Companys insurance operations generated positive
cash flows in excess of its immediate needs. Cash flows provided by
operations were $11.5 million in the first nine months of 2003 compared to
$12.0 million for the comparable period last year.Operating cash flow is primarily used to purchase debt securities. The Company
received proceeds of $27.1 million from investment maturities and repayments in
2003, adding to available cash flows. Such proceeds were $11.3 million in
2002. When market opportunities arise, the Company disposes of selected debt
securities available for sale to improve future investment yields and/or
improve duration matching of its assets and liabilities. Therefore,
dispositions before maturity can vary significantly from year to year.
Proceeds from sales prior to maturity were $55.6 million in 2003, and $56.3
million for the comparable period of 2002.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. Under regulatory requirements, the maximum
amount of dividends that may be paid in 2003 by the Company to its shareholders
without prior regulatory approval is approximately $2.9 million.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.16LiquidityLiquidity pertains to a companys ability to meet the demand for cash
requirements of its business operations and financial obligations. The
Companys two sources of short-term liquidity include its positive cash flow
from operations and its portfolio of marketable securities as described above.
The Company believes that these sources are sufficient to meet its liquidity
needs for the next 12 months.InvestmentsSince December 31, 2002, 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 over 89% of the holdings at September 30, 2003 and 91%
in December 31, 2002 are rated A or better by Standard & Poors Corporation.
For all fixed maturities, 11% in 2003 and 9% in 2002 are rated BBB. Ratings of
BBB- and higher are considered investment grade by the rating services.During the second quarter of 2002, the Company sold a security out of its
held-to-maturity portfolio due to evidence of a significant deterioration in
the issuers credit worthiness. At the time of the sale the security had an
amortized cost of $499,768. The Company realized a loss of $49,768 on the
transaction.Mortgage LoansThe 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:Book ValueNumber of Loans(dollars in thousands)September 30,
    
    December 31,2003
    
    2002
    
    State
    
    September 30, 2003
    
    December 31, 20022
    
    
    
    2
    
    
    Alabama
    
    $
    93
    
    
    
    1004
    
    
    
    6
    
    
    Florida
    
    
    189
    
    
    
    28323
    
    
    
    25
    
    
    Georgia
    
    
    799
    
    
    
    93729
    
    
    
    33
    
    
    
    
    $
    1,081
    
    
    
    1,320

Four loans representing $134,000 in principal are over 30 days delinquent. The
loan-to-value ratio on delinquent loans is 21%.17ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKCredit RiskCredit risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers, which owe the Company money,
will not pay. The Company attempts to minimize these risks by following a
conservative investment strategy and by contracting with reinsuring companies
that meet high standards for rating criteria and other qualifications. The
Company invests principally in government, governmental agency and high quality
corporate bonds having an A rating or better. The fixed maturity portfolio had
an average rating of Aa as rated by Standard & Poors Corporation at September
30, 2003 and 2002.Interest Rate RiskInterest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurers investments. The Companys fixed
maturity investments are subject to interest rate risk. The Company seeks to
manage the impact of interest rate fluctuation through cash flow modeling,
which attempts to match the maturity schedule of its assets with expected
payout of its liabilities. Liabilities for interest sensitive products are
carried at full account value. The fixed maturity portfolio at September 30,
2003 and September 30, 2002 had an effective duration of 4.7 years and 4.4
years, respectively.The table below summarizes the Companys interest rate risk and shows the
effect of a hypothetical 100 basis point increase/decrease in interest rates on
the fair values of the fixed investment portfolio. The selection of 100 basis
point increases/decrease in interest rates should not be construed as a
prediction by the Companys management of future market events, but rather, to
illustrate the potential impact of such events. These calculations may not
fully capture the impact of the changes in the ratio of long-term rates to
short-term rates.Estimated Change in
    Estimated Fair Value After
    Hypothetical PercentageEstimated Value
    
    Interest Rates
    Hypothetical Change in Interest
    Increase (Decrease) InSeptember 30, 2003
    
    (bp-Basis Points)
    Rates
    Shareholders' Equity(dollars in thousands)Fixed Maturities  Held
for Investment
    
    $
    3,512
    
    
    100 bp decrease
    
    
    3,669
    
    
    
    
    
    
    
    N/A100 bp increase
    
    
    3,359
    
    
    
    
    
    
    
    N/AFixed Maturities  Available
for Sale
    
    $
    179,624
    
    
    100 bp decrease
    
    
    187,635
    
    
    
    
    
    
    
    9.2
    %100 bp increase
    
    
    171,810
    
    
    
    
    
    
    
    (9.0
    )%



18ITEM 4. CONTROLS AND PROCEDURESThe Companys Chief Executive Officer and Chief Accounting Officer evaluated
the effectiveness of the Companys disclosure controls and procedures (as
defined in SEC Rule 13a-15(e)) as of September 30, 2003. Based on that
evaluation, such officers have concluded that the Companys disclosure controls
and procedures are effective.During the quarter ended September 30, 2003, there was no change in the
Companys control over financial reporting (as defined in SEC Rule 13a-15(f))
that has materially affected, or is reasonably likely to materially affect the
Companys internal control over financial reporting.19PART II  OTHER INFORMATIONItem 1. Legal ProceedingsThe Company is a defendant in various actions incidental to the conduct of
its business. The Company intends to vigorously defend the litigation and
while the ultimate outcome of these matters cannot be estimated with
certainty, management does not believe the actions will result in any
material loss to the Company.The Company has reached partial settlement of a $900,000 in reinsurance
coverage. A lawsuit was initiated by the Company in the third quarter of
2001. To date, the Company has received $475,000 and continues to seek
additional recoveries against the reinsurance brokers through already
existing legal channels. The remaining amount outstanding is included in
Amounts due from reinsurers on the consolidated condensed balance sheet.Item 2. Changes in Securities and Use of ProceedsNONEItem 3. Defaults Upon Senior SecuritiesNONEItem 4. Submission of Matters to a Vote of Security HoldersNONEItem 5. Other InformationNONEItem 6. Exhibits and Reports on Form 8-K(a) Exhibit IndexExhibit No.
    
    Description11
    
    Statement re: Computation of Per Share Earnings15
    
    Letter Regarding Unaudited Interim Financial Information31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by J. Ridley Howard31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by William J. Barlow32
    
    Section 1350 Certification by J. Ridley Howard and William J. Barlow


(b) Reports on Form 8-KThe Company furnished a report on Form 8-K on August 7, 2003 pursuant to
Item 12 of Form 8-K, Disclosures of Results of Operations and Financial
Condition as directed by the Securities and Exchange Commission in
Release No. 23-47583.The Company furnished a report on Form 8-K on November 10, 2003 pursuant
to Item 5 of Form 8-K, Other Events and Required FD Disclosure as
directed by the Securities and Exchange Commission.The Company furnished a report on Form 8-K on November 12, 2003 pursuant
to Item 12 of Form 8-K, Disclosures of Results of Operations and
Financial Condition as directed by the Securities and Exchange Commission
in Release No. 23-47583.20Pursuant 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
RegistrantDate: 11 / 12/ 03
    
    
    
    /s/ J. Ridley HowardJ. Ridley Howard, Chairman
President and Chief Executive OfficerDate: 11 / 12/ 03
    
    
    
    /s/ William J. BarlowWilliam J. Barlow
Vice President of Finance and Assistant Treasurer




21