##### Table of Contents



Securities and Exchange Commission  FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003
 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from           to Commission File Number 2-39729 Cotton States Life Insurance Company 
  Georgia
    
    58-0830929(State of incorporation
    
    (I.R.S. Employerand jurisdiction)
    
    Identification No.)
 244 Perimeter Center Parkway, N.E., Atlanta, Georgia
    
    30346(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (404) 39l-8600 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: EXEMPT-UNDER SECTION 12(g)(2)(G) Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and has been subject to the filing requirements for at
least the past 90 days. YES [X] NO [  ] Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) 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 $42,583,352 based on the closing price of $10.09 on June 30, 2003,
as reported on the NASDAQ National Market. As of March 26, 2004, there were 6,322,737 shares of registrants common stock
outstanding. The Exhibit Index is located on Page 71 The total number of pages in this document is 78 1




---



TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7  MANAGEMENTS DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAConsolidated Balance SheetsConsolidated Statements of EarningsConsolidated Statements of Shareholders EquityConsolidated Statements of Cash FlowsConsolidated Statements of Comprehensive IncomeNotes to Consolidated Financial StatementsREPORT OF INDEPENDENT AUDITORSITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANYITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINICPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESEX-3.2 AMENDED & RESTATED BYLAWS OF THE REGISTRANTEX-10.3.3 AMENDED & RESTATED EMPLOYMENT AGREEMENTEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF INDEPENDENT AUDITORSEX-23.2 CONSENT OF INDEPENDENT ACCOUNTANTSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO    Table of Contents  
 PART I 
 ITEM 1. BUSINESS General Cotton States Life Insurance Company (the Company) was organized under the
laws of the State of Georgia in 1955. The Company is currently licensed to
transact business in Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
Company currently markets only individual life insurance, payroll deduction
life insurance, guaranteed issue and simplified issue life insurance and
individual annuities. In July of 1989, the Company formed CSI Brokerage Services, Inc. (CSI). CSI
brokers insurance products for the Companys exclusive agents not offered by
the Companys affiliated property and casualty companies. In November of 1989, the Company acquired 60% of the outstanding common stock
of Cotton States Marketing Resources, Inc. (CSMR). During 1992, the Company
acquired the remaining 40% of CSMRs stock. CSMR brokers through the Companys
exclusive agents other insurance companies life and accident and health
products not underwritten by the Company. On February 21, 2002, the Company filed notice of its intent to withdraw its
multi-line exclusive agents from Kentucky primarily due to losses incurred by
the Companys affiliate, Cotton States Mutual Insurance Company. Without
objection from the Kentucky Department of Insurance, the Companys withdrawal
plan was accepted pursuant to Kentucky insurance regulations. It was announced on December 30, 2003 that the Cotton States Insurance Group
(which includes the Company and Cotton States Mutual Insurance Company) 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 and a wholly-owned subsidiary of COUNTRY. Subject to regulatory
approval, shareholder approval, and other conditions set forth in the Agreement
and Plan of Merger, it is anticipated that the transaction will close during
the second quarter of 2004. Principal Products and Methods of Distribution The Companys operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue life
insurance, and (iii) brokerage operations. These segments are differentiated
primarily by their respective methods of distribution and the nature of related
products, as 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
issue and simplified issue products are distributed through independent agents
as well as exclusive agents, and brokerage operations involve third party
products distributed through the Companys exclusive and independent agents.
The Company does not group items on the consolidated balance sheet into
segments, nor does it analyze those items by segment when making management
decisions. The Company allocates net investment income and net realized gains
to its individual life insurance and guaranteed issue and simplified issue life
insurance segments based on the ratio of each segments reserves to total
reserves. Net investment income and net realized gains for the Companys
brokerage segment is based on actual amounts earned by its brokerage
subsidiaries. 2




---



##### Table of Contents



2003
    
    2002
    2001Individual life insurance:Premiums
    
    $
    19,979,437
    
    
    
    19,347,710
    
    
    
    18,658,255Net investment income
    
    
    7,905,844
    
    
    
    8,857,310
    
    
    
    9,458,445Realized investment gains
    
    
    1,624,312
    
    
    
    935,571
    
    
    
    24,969Total revenue
    
    
    29,509,593
    
    
    
    29,140,591
    
    
    
    28,141,669Policyholder benefits and claims
    
    
    10,606,712
    
    
    
    9,478,267
    
    
    
    8,821,942Interest credited
    
    
    5,912,341
    
    
    
    5,904,423
    
    
    
    5,527,001Amortization of deferred policy acquisition costs
    
    
    2,829,148
    
    
    
    2,084,635
    
    
    
    3,248,281Other operating expenses
    
    
    6,350,370
    
    
    
    5,143,895
    
    
    
    5,257,470Total benefits and expenses
    
    
    25,698,571
    
    
    
    22,611,220
    
    
    
    22,854,694Segment profit before income taxes
    
    
    3,811,022
    
    
    
    6,529,371
    
    
    
    5,286,975Guaranteed issue and simplified issue life insurance:Premiums
    
    
    14,358,260
    
    
    
    12,438,241
    
    
    
    10,529,996Net investment income
    
    
    1,036,838
    
    
    
    952,774
    
    
    
    775,780Realized investment gains
    
    
    213,531
    
    
    
    101,134
    
    
    
    2,532Total revenue
    
    
    15,608,629
    
    
    
    13,492,149
    
    
    
    11,308,308Policyholder benefits and claims
    
    
    11,311,624
    
    
    
    9,332,175
    
    
    
    7,656,444Amortization of deferred policy acquisition costs
    
    
    2,262,856
    
    
    
    1,676,350
    
    
    
    1,218,431Other operating expenses
    
    
    1,854,716
    
    
    
    2,001,826
    
    
    
    1,913,723Total benefits and expenses
    
    
    15,429,196
    
    
    
    13,010,351
    
    
    
    10,788,598Segment profit before income taxes
    
    
    179,433
    
    
    
    481,798
    
    
    
    519,710Brokerage:Brokerage commissions
    
    
    4,906,455
    
    
    
    4,242,470
    
    
    
    4,190,482Net investment income
    
    
    8,047
    
    
    
    18,880
    
    
    
    48,397Realized investment gains
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    
    4,914,502
    
    
    
    4,261,350
    
    
    
    4,238,879Operating expenses
    
    
    1,003,102
    
    
    
    966,955
    
    
    
    1,106,448Segment profit before income taxes
    
    
    3,911,400
    
    
    
    3,294,395
    
    
    
    3,132,431Combined segment profit before income taxes
    
    
    7,901,855
    
    
    
    10,305,564
    
    
    
    8,939,116Group life insurance and individual
accident and health results
    
    
    (58,444
    )
    
    
    (35,819
    )
    
    
    (74,560
    )Income before federal income taxes
    
    $
    7,843,411
    
    
    
    10,269,745
    
    
    
    8,864,556
 Narrative Description of Business Segments  (i)
    
    Individual Life  The major forms of individual life insurance offered by the Company include
universal life, graded premium whole life, participating whole life, term
life, various supplemental riders including, but not limited to, accidental
death, disability waiver and guaranteed insurability, and disability income
riders. These products are sold by the Companys 251 multi-line exclusive
agents in Alabama, Florida, Georgia, and Tennessee. 3




---



##### Table of Contents



The Company offers its insurance through multi-line exclusive agents who also
write all lines of property and casualty insurance offered by Cotton States
Mutual Insurance Company (Mutual) and its subsidiary, Shield Insurance
Company (Shield) (collectively, the Cotton States Group). See Item 13 of
this report for an explanation of the relationship between the Company,
Mutual, and Shield. Multi-line exclusive agents are under contract to the
Company, Mutual, and Shield, and are paid on a commission basis. The
Companys multi-line exclusive agents are located in the following states: Number of AgentsDecember 31,2003
    
    2002
    
    State46
    
    
    
    52
    
    
    Alabama23
    
    
    
    24
    
    
    Florida163
    
    
    
    169
    
    
    Georgia19
    
    
    
    27

    
    
    TennesseeTotal
    
    
    251
    
    
    
    272
  Unless the need for a medical examination is indicated by the application or
an investigation, the Company writes individual life insurance based on age
without requiring blood and specimen in the following maximum amounts: Age Group
    
    Maximum Insurance0-17
    
    $
    100,00018-40
    
    
    74,99941-50
    
    
    50,00051 and over
    
    
    25,000
  As of December 31, 2003, less than 2.3% of the Companys individual life
premiums were represented by what the Company believes to be substandard
risks. Substandard life insurance risks are accepted by the Company at
increased rates. The Company has no fixed maximum on the size of substandard
policies and will entertain any application on which it can obtain
reinsurance which it believes to be adequate.The Company, as do others in the insurance industry, reinsures with other
companies portions of the individual life insurance policies it underwrites.
Reinsurance enables an insurance company to write a policy in an amount
larger than the risk it desires to assume. A contingent liability exists on
insurance ceded to the reinsurer which might become a liability of the
Company in the event that the reinsurer fails to meet its obligations under
the reinsurance treaty.The Company presently retains, with respect to individual life policies,
generally no more than $100,000 of insurance on any one life, which may be
reduced, depending upon the age and the physical classification of the
insured. All accidental death riders are 100% reinsured.(ii)
    
    Guaranteed Issue and Simplified Issue Whole Life InsuranceThe Company offers Guaranteed Issue and Simplified Issue whole life insurance
through its multi-line agency force and approximately 4,700 independent
agents. The independent agents sell these products in all states in which
the Company is licensed to conduct business.Both plans are level-premium, cash value permanent life insurance products
issued from $2,500 to $35,000 face amounts. Both plans are frequently used
by individuals to cover final expenses. They are designed to be sold as
companion plans using a simple application with no medical exams or tests.
If all health questions asked of the applicant by the Company can be answered
NO, the Simplified Issue policy may be issued. Otherwise, the Guaranteed
Issue policy will be issued. 4




---



##### Table of Contents



Guaranteed Issue whole life is available for issue ages 46-80. The death
benefit in policy years one through three is limited to a return of premium
plus 10%. However, the full death benefit is payable in all years in case of
accidental death. After three years, the full death benefit is payable for
any cause of death.Simplified Issue whole life is available for issue ages 0-80. The full death
benefit is payable from the issue date.(iii)
    
    BrokerageThe Company owns two brokerage subsidiaries, CSI and CSMR. CSI provides the
Company with commission income from brokerage agreements with other property
and casualty insurance carriers. These carriers supply the Companys
multi-line agents with property and casualty products that the Companys
affiliated property and casualty companies do not underwrite, such as
non-standard auto insurance, crop hail insurance, multi-peril crop insurance,
mobile home insurance, poultry house insurance and flood insurance.Approximately 69% of CSIs brokerage revenues come from the sale of
non-standard auto insurance through two carriers. Approximately 11% of CSIs
revenue comes from the sale of crop hail and multi-peril crop insurance
through one carrier.CSMR provides the Company with commission income from brokerage agreements
with other life and health insurance companies. These companies supply the
Companys multi-line agents with life and health products that the Company
does not choose to underwrite, such as individual major-medical policies,
impaired risk life insurance, first to die life insurance, and group life and
health insurance. CSMR has contracted with approximately 4,700 independent
agents to write the Companys Guaranteed Issue and Simplified Issue whole
life insurance. Approximately 53% of CSMRs brokerage revenues come from the
sale of life and health insurance through five carriers. For further information regarding the Companys business segments, see Item 7,
Managements Discussion and Analysis of Consolidated Financial Condition and
Results of Operations. Investments Insurance company investments must comply with applicable laws and regulations
which prescribe the kind, quality and concentration of investments. In
general, these laws and regulations permit investments in federal, state and
municipal obligations, corporate bonds, preferred and common equity securities,
mortgage loans, real estate and certain other investments, subject to specified
limits and certain other qualifications. The investments of the Company are directed by the Companys Vice President of
Finance and Assistant Treasurer under the supervision of the Companys Board of
Directors. The Company follows an investment policy which is regularly
reviewed and revised. The Companys policy emphasizes investment grade, fixed
maturity securities and maximization of after-tax yields and places certain
restrictions to limit portfolio concentrations and market exposure. Sales of
securities are undertaken, with resulting gains or losses, in order to enhance
after-tax yield and keep the portfolio in line with current market conditions. Competition The life insurance industry is highly competitive and includes a large number
of insurance companies, many of which have substantially greater financial
resources, broader and more diversified product lines, more favorable ratings
from A.M. Best and Standard & Poors, and larger staffs than the Company. The
operating results of companies in the life insurance industry have historically
been subject to significant fluctuations due to competition, economic
conditions, interest rates, investment performance, maintenance of insurance 5




---



##### Table of Contents



ratings from rating agencies and other factors. Competitive factors applicable
to the Companys business include product mix, policy benefits, service to
policyholders, and premium rates. The Company believes that its current
benefits and premium rates are generally competitive with those offered by
other companies and that service to policyholders and prompt and fair payment
of claims continue to be important factors in the Companys ability to remain
competitive. The Company has certain advantages that it believes better enable it to keep
its premium rates competitive with similar policies offered by competing
companies, including the following:  1.
    
    The Company offers most of its insurance through the same agents
who write property and casualty insurance for Mutual and Shield. The
sale of insurance through the same agents who sell property and
casualty insurance enables the Company to incur less agency
development and sales expense than is customary in the industry;2.
    
    Because the Companys agents can provide customers with coverage
for all major lines of individual insurance they may utilize account
selling. Account selling enables insureds to contact one agent
regarding their total insurance needs; and3.
    
    The Company shares certain facilities, equipment and personnel
with Mutual and Shield. The Company believes that sharing these
expenses has a favorable impact on the ratio of expenses to premium
income and enables the Company to enjoy economies of scale. Regulation General.The Company is subject to regulation and supervision in all
jurisdictions in which it conducts business. In general, state insurance laws
establish supervisory agencies with broad administrative powers relating to,
among other things, the granting and revoking of licenses to transact business,
regulation of trade practices, premium rate levels, premium rate increases,
licensing of agents, approval of content and form of policies, maintenance of
specified minimum statutory reserves and statutory capital and surplus,
deposits of securities, form and content of required financial statements,
nature of investments, and limitations on dividends to stockholders. The
purpose of such regulation and supervision is primarily to provide safeguards
for policyholders rather than to protect the interests of shareholders. The
Company is domiciled in Georgia and is therefore subject to regulation under
Georgia laws. The National Association of Insurance Commissioners (NAIC) is a voluntary
association of all of the state insurance commissioners in the United States.
The primary function of the NAIC is to develop model laws on key insurance
regulatory issues that can be used as guidelines for individual states in
adopting or enacting insurance legislation. While the NAIC model laws are
accorded substantial deference within the insurance industry, these laws are
not binding on insurance companies unless enacted into state law and variations
from the model laws from state to state are common. Change of Control. Any transactions that would constitute a change in control
of the Company would generally require prior approval by the insurance
department of the State of Georgia, the Companys state of domicile, and may
require pre-acquisition notification in those states that have adopted
pre-acquisition notification provisions and in which the Company is admitted to
transact business. In conjunction with the proposed Agreement and Plan of
Merger with COUNTRY, filings have been made for approval of the transaction
under the insurance laws of Georgia, Illinois, and Connecticut. Product Approvals. Generally, before an insurance company is permitted to
market an individual insurance product in a particular state, it must obtain
regulatory approval from that state and adhere to that states insurance laws
and regulations, which include, among other things, specific requirements
regarding the form, language, premium rates and policy benefits of that
product. Such regulation may delay the introduction of new products and may
impede, or impose burdensome conditions on, rate increases or other actions
that the Company may wish to take in order to enhance its operating results.
In addition, federal or state legislation 6




---



##### Table of Contents



or regulatory pronouncements may be enacted that may prohibit or impose
restrictions on the ability to sell certain types of insurance products or
impose other restrictions on the Companys operations. No assurances can be
given that future legislative or regulatory changes will not adversely affect
the Companys business, financial condition or results of operations. Risk-Based Capital (RBC).In order to enhance the regulation of insurer
solvency, the NAIC has adopted a formula and model law to implement RBC
requirements for most life and health insurance companies which is designed to
determine minimum capital requirements based on insurance and investment risks
and to raise the level of protection that statutory surplus provides for
policyholder obligations. Under laws adopted by individual states, insurers
having total adjusted capital that is less than that required by the RBC
calculation will be subject to varying degrees of regulatory action, depending
on the level of capital inadequacy. The RBC law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the company action level as defined by the NAIC,
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The regulatory action level, as
defined by the NAIC, requires an insurer to submit a plan containing corrective
actions and requires the relevant insurance commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The authorized control level, as defined by the
NAIC, authorizes the relevant insurance commissioner to take whatever
regulatory actions considered necessary to protect the best interest of the
policyholders and creditors of the insurer which may include the actions
necessary to cause the insurer to be placed under regulatory control, i.e.,
rehabilitation or liquidation, if surplus falls below 100% of the RBC amount.
The fourth action level is the mandatory control level as defined by the NAIC,
which requires the relevant insurance commissioner to place the insurer under
regulatory control if surplus falls below 70% of the RBC amount. The formulas have not been designed to differentiate among adequately
capitalized companies that operate with higher levels of capital. Therefore,
it is inappropriate and ineffective to use the formulas to rate or to rank
these companies. At December 31, 2003, the Company had total adjusted capital
in excess of amounts requiring company or regulatory action at any prescribed
RBC action level. Dividends. Dividends paid by the Company are subject to the regulations of the
insurance laws and practices of the Georgia Department of Insurance.
Generally, the Georgia Insurance Code 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 (12) 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. Pursuant to the
Agreement and Plan of Merger with COUNTRY, the Company agreed that after March
31, 2004 it would not declare any regular quarterly dividends until such time
as either the agreement is terminated or the merger is consummated. Guaranty Associations.The Company may be required, under the solvency or
guaranty laws of most states in which they do business, to pay assessments (up
to prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. Non-affiliated insurance company insolvencies
increase the possibility that such assessments may be required. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurers financial strength and, in certain instances, may be
offset against future premium taxes. The incurrence and amount of such
assessments may increase in the future without notice. The Company pays the
amount of such assessments as they are incurred. Assessments that cannot be
offset against future premium taxes are charged to expense. Assessments that
qualify for offset against future premium taxes are capitalized and are offset
against such future premium taxes. As a result of such assessments, the
Company paid approximately $2,500 during the year ended December 31, 2003. 7




---



##### Table of Contents



Employees In addition to its principal officers, the Company shares 121 salaried
employees with Shield and Mutual. The Company pays an allocated portion of the
shared employees salaries, either based upon the Companys premium income in
relation to the premium income of Mutual and Shield or the actual time expended
on each companys affairs. The Company and its subsidiaries also have 35
salaried employees who work on a full-time basis in its home office, where all
administrative functions, such as underwriting, billing and collection of
premiums, are centralized and from which all sales activities are directed.
None of the Companys employees is subject to a collective bargaining
agreement. The Company believes its employee relations are good. Available Information The Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to reports filed pursuant to Section
13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are
available on the Companys website at www.cottonstatesinsurance.com via a link
to the SEC website. These reports are made available at no cost. The Companys Code of Ethics is available on its website at
www.cottonstatesinsurance.com and is available without charge in print to any
shareholder who makes a request by writing to Corporate Secretary, Cotton
States Life Insurance Company, 244 Perimeter Center Parkway N.E., Atlanta,
Georgia 30346. 
 ITEM 2. PROPERTIES The Company, Mutual, and Shield occupy offices located at 244 Perimeter Center
Parkway, Atlanta, Georgia. The building is owned by a general partnership
composed of Mutual and Gold Kist Inc. (Gold Kist). The Company has no
ownership interest in the partnership. The facility consists of a three-story
office building containing approximately 260,000 square feet of space of which
the Company, Mutual and Shield share approximately 90,000 square feet. The
Company believes that the facility is suitable to its business. Rental expense
is allocated to the Company based on its proportionate share of square footage
occupied. 
 ITEM 3. 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 a reached 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. Accordingly, the Company has reduced the
receivable by that amount and charged the amount to benefits expense in the
accompanying financial statements. The Company believes the remaining amount
outstanding to be fully recoverable and has included it in reinsurance
receivable on the consolidated balance sheet. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders by the Company during the
fourth quarter of 2003. The Company expects to submit the matter of the
proposed merger with COUNTRY for a vote by shareholders in the second quarter
of 2004. 8




---



##### Table of Contents



PART II 
 ITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES On January 1, 2004, there were approximately 1,383 shareholders of record
of the Companys common stock. The stock (symbol CSLI) is traded
over-the-counter on the NASDAQ National Market System. Price history as
provided by NASDAQ and dividends declared during the past two years are
presented below: Stock Price (1)
    
    DividendHigh
    
    Low
    
    Declared2003
    
    
    First Quarter
    
    $
    11.00
    
    
    
    8.10
    
    
    
    .04Second Quarter
    
    
    10.55
    
    
    
    9.40
    
    
    
    .04Third Quarter
    
    
    10.50
    
    
    
    9.00
    
    
    
    .04Fourth Quarter
    
    
    19.80
    
    
    
    9.90
    
    
    
    .042002
    
    
    First Quarter
    
    $
    10.50
    
    
    
    9.41
    
    
    
    .04Second Quarter
    
    
    10.55
    
    
    
    9.45
    
    
    
    .04Third Quarter
    
    
    10.14
    
    
    
    7.72
    
    
    
    .04Fourth Quarter
    
    
    10.10
    
    
    
    8.25
    
    
    
    .04
  (1)
    
    The prices presented above are sale prices which represent price between
broker-dealers and do not include mark-ups or mark-downs or any commission
to the broker-dealer. Therefore, the prices presented above do not
reflect prices in actual transactions. Securities Authorized for Issuance Under Equity Compensation Plans The Equity Compensation Plan Information is set forth in Item 12 of this Form
10-K. 9




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA Ten-Year Selected Financial Data 2003
    
    2002
    
    2001
    
    2000
    
    1999As of December 31Total assets
    
    $
    283,772,372
    
    
    
    261,810,004
    
    
    
    234,780,338
    
    
    
    211,300,570
    
    
    
    190,516,318Total liabilities
    
    $
    198,163,258
    
    
    
    180,439,595
    
    
    
    162,135,020
    
    
    
    147,029,701
    
    
    
    134,565,951Total shareholders equity
    
    $
    85,609,114
    
    
    
    81,370,409
    
    
    
    72,645,318
    
    
    
    64,270,869
    
    
    
    55,950,367Book value per share
    
    $
    13.54
    
    
    
    12.86
    
    
    
    11.47
    
    
    
    10.13
    
    
    
    8.84Closing price per share
    
    $
    19.72
    
    
    
    9.54
    
    
    
    9.60
    
    
    
    11.50
    
    
    
    8.63Years ended December 31Premiums
    
    $
    35,882,106
    
    
    
    33,092,092
    
    
    
    30,220,737
    
    
    
    26,816,523
    
    
    
    23,302,097Net investment income,
realized investment gains
and brokerage income
    
    $
    15,695,028
    
    
    
    15,108,138
    
    
    
    14,500,606
    
    
    
    14,693,886
    
    
    
    13,555,085Total revenue
    
    $
    51,577,134
    
    
    
    48,200,230
    
    
    
    44,721,343
    
    
    
    41,510,409
    
    
    
    36,857,182Benefits and expenses
    
    $
    43,733,723
    
    
    
    37,930,485
    
    
    
    35,856,787
    
    
    
    30,657,137
    
    
    
    26,673,847Net income
    
    $
    5,282,301
    
    
    
    7,308,874
    
    
    
    6,445,672
    
    
    
    7,606,215
    
    
    
    7,327,945Basic net income per share
    
    $
    0.84
    
    
    
    1.15
    
    
    
    1.02
    
    
    
    1.20
    
    
    
    1.16Diluted net income per share
    
    $
    0.80
    
    
    
    1.13
    
    
    
    .99
    
    
    
    1.18
    
    
    
    1.14Dividends per share
    
    $
    .160
    
    
    
    .160
    
    
    
    .160
    
    
    
    .160
    
    
    
    .160
 1998
    
    1997
    
    1996
    
    1995
    
    1994As of December 31Total assets
    
    $
    180,773,289
    
    
    
    165,337,309
    
    
    
    148,824,187
    
    
    
    139,381,979
    
    
    
    124,412,468Total liabilities
    
    $
    125,857,189
    
    
    
    115,941,296
    
    
    
    105,910,335
    
    
    
    99,694,942
    
    
    
    90,855,648Total shareholders equity
    
    $
    54,916,100
    
    
    
    49,396,013
    
    
    
    42,913,852
    
    
    
    39,687,037
    
    
    
    33,556,820Book value per share
    
    $
    8.63
    
    
    
    7.72
    
    
    
    6.71
    
    
    
    6.23
    
    
    
    5.28Closing price per share
    
    $
    14.88
    
    
    
    15.25
    
    
    
    7.60
    
    
    
    4.80
    
    
    
    3.63Years ended December 31Premiums
    
    $
    19,935,354
    
    
    
    17,620,184
    
    
    
    15,400,543
    
    
    
    15,061,541
    
    
    
    15,128,529Net investment income,
realized investment gains
and brokerage income
    
    $
    12,365,999
    
    
    
    11,308,794
    
    
    
    9,458,474
    
    
    
    8,814,035
    
    
    
    7,597,136Total revenue
    
    $
    32,301,353
    
    
    
    28,928,978
    
    
    
    24,859,017
    
    
    
    23,875,576
    
    
    
    22,725,665Benefits and expenses
    
    $
    21,916,010
    
    
    
    20,451,884
    
    
    
    18,735,863
    
    
    
    18,548,121
    
    
    
    18,333,697Net income
    
    $
    7,240,585
    
    
    
    6,304,558
    
    
    
    4,832,577
    
    
    
    4,070,871
    
    
    
    3,303,024Basic net income per share
    
    $
    1.13
    
    
    
    .99
    
    
    
    .76
    
    
    
    .64
    
    
    
    .54Diluted net income per share
    
    $
    1.10
    
    
    
    .96
    
    
    
    .74
    
    
    
    .63
    
    
    
    .51Dividends per share
    
    $
    .160
    
    
    
    .126
    
    
    
    .102
    
    
    
    .072
    
    
    
    .060
 Note: All share and per share amounts have been adjusted for the following stock splits: October 1995
    
    five-for-fourApril 1997
    
    five-for-fourJanuary 1998
    
    three-for-two
 10




---



##### Table of Contents



ITEM 7 - MANAGEMENTS DISCUSSION AND ANALYSIS OF CONSOLIDATED 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, 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 during the second quarter of 2004. 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 and shareholder
approval, 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 Annual Report on Form 10-K, 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.
    
    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. 11




---



##### Table of Contents




    
    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 accounting
principles generally accepted in the United States 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 CostsPolicy 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 $11.1 million in 2003,
$10.2 million in 2002, and $9.8 million in 2001. 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 $63.8 million and $57.7 million at December 31, 2003
and 2002, respectively. 12




---



##### Table of Contents



Statement of Financial Accounting Standard (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.InvestmentsInvestment 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 2% 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




---



##### Table of Contents



The following table provides information on the Companys fixed maturity
investments as of December 31 (dollars in thousands): 2003
    
    2002Carrying
    
    
    
    
    
    CarryingType of Investments
    
    Value
    
    Percent
    
    Value
    
    PercentFixed maturities, held for investment:Public utilities
    
    $
    1,848
    
    
    
    1.0
    
    
    $
    3,848
    
    
    
    2.4All other corporate bonds
    
    
    1,500
    
    
    
    0.8
    
    
    
    3,200
    
    
    
    2.0Total fixed maturities held for investment
    
    
    3,348
    
    
    
    1.8
    
    
    
    7,048
    
    
    
    4.4Fixed maturities, available for sale:United States government and government
agencies and authorities
    
    
    76,551
    
    
    
    42.1
    
    
    
    73,597
    
    
    
    46.2Foreign governments
    
    
    5,149
    
    
    
    2.8
    
    
    
    3,390
    
    
    
    2.1Public utilities
    
    
    4,145
    
    
    
    2.3
    
    
    
    7,492
    
    
    
    4.7All other corporate bonds
    
    
    92,864
    
    
    
    51.0
    
    
    
    67,828
    
    
    
    42.6Total fixed maturities available for sale
    
    
    178,709
    
    
    
    98.2
    
    
    
    152,307
    
    
    
    95.6Total fixed maturities
    
    $
    182,057
    
    
    
    100.0
    
    
    $
    159,355
    
    
    
    100.0
  Mortgage-backed securities comprised 22% of the Companys fixed maturity
portfolio at December 31, 2003 as compared to 21% at December 31, 2002.
Mortgage-backed securities are subject to risks associated with variable
pre-payments. This 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. 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.Other-Than-Temporary ImpairmentsOne 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 14




---



##### Table of Contents



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.ReservesThe 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.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 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. 15




---



##### Table of Contents



Recent 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 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 financial statements issued for periods ending after December 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. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
addresses certain financial instruments that, under previous guidelines, could
be accounted for as equity, but now must be classified as liabilities in the
statement of financial position. These financial instruments include: (a)
mandatorily redeemable financial instruments, (b) obligations to repurchase the
issuers equity shares by transferring assets, and (c) obligations to issue a
variable number of shares. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
implementation of SFAS No. 150 did not have an impact on the Companys
consolidated financial statements. Consolidated Results of Operations  Executive SummaryThe Company is headquartered in Atlanta, Georgia and sells individual life
insurance products through a distribution force consisting of 251 multi-line
exclusive agents and approximately 4,700 independent agents as of December
31, 2003. Payroll deduction universal life products are also marketed
through a third party administrator. The Companys two brokerage
subsidiaries generate commission income from brokerage agreements with other
non-affiliated property and casualty and life and health insurance carriers.The Companys profitability is primarily a factor of the following:  
    
    The volume of life insurance business in force, which is driven by
the level of sales and the persistency of the business written.
    
    The ability to price life insurance products to earn acceptable
margins over the cost of providing benefits and the expenses of
acquiring and administering the products. Competitive conditions,
mortality experience, persistency, investment results and our ability to
maintain expenses in accordance with pricing assumptions drive the
Companys margins.
    
    The amount of spread (excess of net investment income earned over
interest credited) earned on universal life contract holders account
balances.
    
    The ability of the brokerage subsidiaries to generate commission
income through the sale of other companies products. 16




---



##### Table of Contents




    
    The ability to manage the investment portfolio to maximize investment
returns while providing adequate liquidity for obligations to
policyholders and minimizing the risk of defaults or impairments of
invested assets.
    
    The ability to manage the level of operating expenses.  Consolidated Summary of Results of Operation 2003 vs.
    
    2002 vs.2002
    
    2001(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    Change
    
    ChangePremiums
    
    $
    35,882
    
    
    $
    33,092
    
    
    $
    30,221
    
    
    
    8.4
    %
    
    
    9.5
    %Net investment income
    
    
    8,951
    
    
    
    9,829
    
    
    
    10,283
    
    
    
    (8.9
    )
    
    
    (4.4
    )Brokerage commissions
    
    
    4,906
    
    
    
    4,242
    
    
    
    4,190
    
    
    
    15.7
    
    
    
    1.2Net realized capital gains
    
    
    1,838
    
    
    
    1,037
    
    
    
    27
    
    
    
    77.3
    
    
    NMTotal Revenue
    
    
    51,577
    
    
    
    48,200
    
    
    
    44,721
    
    
    
    7.0
    
    
    
    7.8Benefits and claims
    
    
    23,479
    
    
    
    20,117
    
    
    
    17,552
    
    
    
    16.7
    
    
    
    14.6Interest credited
    
    
    5,913
    
    
    
    5,904
    
    
    
    5,527
    
    
    
    0.1
    
    
    
    6.8Amortization of deferred
policy acquisition costs
    
    
    5,092
    
    
    
    3,761
    
    
    
    4,466
    
    
    
    35.4
    
    
    
    (15.8
    )Operating expenses
    
    
    9,250
    
    
    
    8,148
    
    
    
    8,311
    
    
    
    13.5
    
    
    
    (2.0
    )Total Benefits and
Expenses
    
    
    43,734
    
    
    
    37,930
    
    
    
    35,856
    
    
    
    15.3
    
    
    
    5.8Income Before
Income Tax Expense
    
    
    7,843
    
    
    
    10,270
    
    
    
    8,865
    
    
    
    (23.6
    )
    
    
    15.9Income tax expense
    
    
    2,561
    
    
    
    2,961
    
    
    
    2,419
    
    
    
    (13.5
    )
    
    
    22.4Net Income
    
    $
    5,282
    
    
    $
    7,309
    
    
    $
    6,446
    
    
    
    (27.7
    )
    
    
    13.4
 NM = Not Meaningful  Net IncomeFollowing is a summary of net income by business segment for the years ended
December 31 (dollars in thousands): 2003 vs.
    
    
    
    
    
    2002 vs.2002
    
    
    
    
    
    20012003
    
    2002
    
    Change
    
    2001
    
    ChangeGuaranteed issue and
simplified issue
    
    $
    123
    
    
    $
    355
    
    
    
    (65
    )%
    
    $
    397
    
    
    
    (11
    )%Individual life insurance:Traditional
    
    
    525
    
    
    
    1,477
    
    
    
    (64
    )
    
    
    763
    
    
    
    94Universal life
    
    
    2,092
    
    
    
    3,329
    
    
    
    (37
    )
    
    
    3,276
    
    
    
    2Total individual life
insurance
    
    
    2,617
    
    
    
    4,806
    
    
    
    
    
    
    
    4,039
    
    
    
    19Brokerage operations
    
    
    2,582
    
    
    
    2,174
    
    
    
    19
    
    
    
    2,067
    
    
    
    5Other lines
    
    
    (40
    )
    
    
    (26
    )
    
    
    (54
    )
    
    
    (57
    )
    
    
    54Net Income
    
    $
    5,282
    
    
    $
    7,309
    
    
    
    (28
    )
    
    $
    6,446
    
    
    
    13
  2003 results declined as compared to 2002 due primarily to a significant
increase in fourth quarter 2003 17




---



##### Table of Contents



mortality experience in the Companys individual life products.
Additionally, 2003 results reflect an increase in operating expenses as
compared to 2002, caused by an increase in standard operating costs as well
as transaction costs associated with the anticipated merger with COUNTRY.
Continued growth in premiums, mortality that was consistent with managements
expectations, and lower operating expenses accounted primarily for the
improved results in 2002 compared to 2001. In addition, 2002 results reflect
a favorable adjustment to the amortization of policy acquisition costs
resulting from updating actuarial assumptions. Other lines consist of the
Companys participation in a federally sponsored group life pool and income
from a closed block of individual accident and health business.PremiumsPremiums from individual life, guaranteed issue and simplified issue
products, and other lines are as follows (dollars in thousands): 2003 vs.
    
    
    
    
    
    2002 vs.2002
    
    
    
    
    
    20012003
    
    2002
    
    Change
    
    2001
    
    ChangeGuaranteed issue and
simplified issue life
insurance
    
    $
    14,358
    
    
    $
    12,438
    
    
    
    15
    %
    
    $
    10,530
    
    
    
    18
    %Individual life insurance:Traditional life
    
    
    6,810
    
    
    
    6,776
    
    
    
    1
    
    
    
    6,285
    
    
    
    8Universal life
    
    
    13,170
    
    
    
    12,572
    
    
    
    5
    
    
    
    12,373
    
    
    
    2Total individual
life insurance
    
    
    19,980
    
    
    
    19,348
    
    
    
    3
    
    
    
    18,658
    
    
    
    4Other lines
    
    
    1,544
    
    
    
    1,306
    
    
    
    18
    
    
    
    1,033
    
    
    
    26Total premiums
    
    $
    35,882
    
    
    $
    33,092
    
    
    
    8
    
    
    $
    30,221
    
    
    
    10
  Guaranteed issue and simplified issue life insurance premiums continued to
show significant growth for the three year period from 2001 to 2003,
primarily as a result of sustained production by the Companys independent
agency force which had approximately 4,700 agents under contract at December
31, 2003 compared to approximately 4,300 in 2002 and approximately 4,400 in
2001. 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 an increase in production of the Companys universal life product.
The exclusive agency force of 251 as of December 31, 2003 compares to 272 as
of the same date in 2002 and 266 in 2001. Other premiums consist of the
Companys participation in a federally sponsored group life pool and income
from a closed block of individual accident and health business. 18




---



##### Table of Contents



Investment Income and Realized Gains and LossesThe following table summarizes the Companys investment results for the years
ended December 31 (dollars in thousands): 2003
    
    2002
    
    2001Net investment income - excluding policy
loan income
    
    $
    8,182
    
    
    $
    9,086
    
    
    $
    9,607Policy loan income
    
    
    769
    
    
    
    743
    
    
    
    676Net investment income - total
    
    $
    8,951
    
    
    $
    9,829
    
    
    $
    10,283Yield on average invested assets (1)
    
    
    5.0
    %
    
    
    6.0
    %
    
    
    6.7
    %Gross gains on sales
    
    $
    2,460
    
    
    $
    4,080
    
    
    $
    1,093Gross losses on sales
    
    
    (266
    )
    
    
    (1,195
    )
    
    
    (1,066
    )Impairments
    
    
    (356
    )
    
    
    (1,848
    )
    
    
    Net realized capital gains, before tax
    
    $
    1,838
    
    
    $
    1,037
    
    
    $
    27
  (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.  The average gross annual yield on fixed maturities declined in both 2003 and
2002 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 mid-2002 to mid-2003. The
average yield on a five-year U.S. Treasury note declined from 4.45% for the
first half of 2002 to 3.18% for the second half of 2002 to 2.75% for the
first half of 2003, and increased to 3.20% for the last half of 2003. At
December 31, 2003, the market yield for five year U.S. Treasury Securities
was 3.27%. The Company anticipates that the investment yield on its
portfolio will continue to decline if market interest rates remain at 2003
levels.Due to favorable market conditions caused by lower interest rates, the
Company realized net gains of approximately $2,194,000, $2,885,000 and
$27,000 in 2003, 2002, and 2001, respectively, from the sale of fixed
maturity and equity securities.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 12 equity
securities. These write-downs were the result of the Company determining
that an other-than-temporary impairment had occurred.During 2002 the Company sold a security out of its held-to-maturity portfolio
due to evidence of a significant deterioration in the issuers
creditworthiness. At the time of sale the security had an amortized cost of
$499,768. The Company realized a loss of $49,768 on the transaction.During the second quarter of 2002 the Company realized a pre-tax investment
loss of $850,000 from the write-down of the carrying value of a WorldCom,
Inc. debt security. This write-down was the result of the Company
determining that an other-than-temporary impairment had occurred. 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. 19




---



##### Table of Contents



During the fourth quarter of 2002 the Company realized a pre-tax investment
loss of $460,000 from the write-down of the carrying value of ten equity
securities and a pre-tax investment loss of $418,000 from the write-down of
the Companys investment in a limited partnership. These write-downs were
the result of the Company determining that an other-than-temporary impairment
had occurred.Brokerage CommissionsExclusive agents sell products that the Cotton States Group does not
underwrite (both life and property and casualty) but are provided through the
Companys brokerage operations, and for which the Company receives override
commission. Brokerage commissions increased 16% in 2003 compared to 2002 due
primarily to increased sales of non-standard automobile policies. Brokerage
commissions for 2002 were flat as compared to 2001 due to decreased override
commissions on the sale of multi-peril crop and crop hail products. This
decrease in brokerage commissions was partially offset by an 11% increase in
commissions on the sale of non-standard automobile policies.Benefits and ClaimsLife benefits and claims, including reserve increases on traditional life and
guaranteed issue and simplified issue products, are as follows (dollars in
thousands): 2003
    
    2002
    
    2001Benefits
    
    
    
    
    
    Benefits
    
    
    
    
    
    Benefitsand
    
    % of
    
    and
    
    % of
    
    and
    
    % ofClaims
    
    Premium
    
    Claims
    
    Premium
    
    Claims
    
    PremiumGuaranteed issue and
simplified issue
    
    $
    11,312
    
    
    
    79
    
    
    $
    9,332
    
    
    
    75
    
    
    $
    7,656
    
    
    
    73Individual life insurance:Traditional life
    
    
    5,392
    
    
    
    79
    
    
    
    4,772
    
    
    
    70
    
    
    
    4,622
    
    
    
    73Universal life
    
    
    5,214
    
    
    
    40
    
    
    
    4,706
    
    
    
    37
    
    
    
    4,201
    
    
    
    34Total individual life insurance
    
    
    10,606
    
    
    
    53
    
    
    
    9,478
    
    
    
    49
    
    
    
    8,823
    
    
    
    47Other benefits and claims
    
    
    1,561
    
    
    
    101
    
    
    
    1,307
    
    
    
    100
    
    
    
    1,073
    
    
    
    104Total Benefits and Claims
    
    $
    23,479
    
    
    
    65
    
    
    $
    20,117
    
    
    
    61
    
    
    $
    17,552
    
    
    
    58
  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 issue and simplified issue experience for the
three year period is consistent with the Companys future expectations for
those products as the block of business matures. Individual life benefits
increased in 2003 compared to 2002 due to a significant increase in mortality
in the Companys traditional life and universal life products during the
fourth quarter of 2003. Individual life benefits increased in 2002 compared
to 2001 due to higher traditional life reserve increases, which were the
result of an overall improvement in persistency. Death benefits for 2002
were consistent with managements expectations.Due to the Companys small size, quarterly fluctuations, even when they
remain within the normal range, will affect the total benefits and claims for
the fiscal year. During 2003, 2002, and 2001, the Company experienced
emerged mortality of 104%, 88%, and 89% of expected mortality, respectively,
related to its traditional individual life insurance business. 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 and
has also routinely purchased annual aggregate stop loss reinsurance coverage
in excess of 120% of expected mortality. The Company did not experience any
material impact on reinsurance costs as a result of the events of September
11, 2001.The Company has reached a partial settlement regarding $900,000 in
reinsurance coverage. In addition, 20




---



##### Table of Contents



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. Accordingly, the Company has reduced the
receivable by that amount and charged the amount to benefits expense in the
accompanying financial statements. The Company believes the remaining amount
outstanding to be fully recoverable and has included it in reinsurance
receivable on the consolidated balance sheet.Other benefits and claims consist of participation in a federally sponsored
group life pool and benefits on a closed block of individual accident and
health business.Interest Credited to PolicyholdersInterest credited to universal life contracts for 2003 was flat as compared
to 2002 and increased 7% in 2002 as compared to 2001 reflecting growth in
universal life policy accumulations, offset by reductions to the annual
interest rate credited to policyholders in 2003 and 2002. The annual
interest rate credited to policyholders of universal life contracts was 5.75%
for the first two months of 2003. Effective March 1, 2003, the annual rate
credited to policyholders changed to 5.4%. The annual rate credited to
policyholders was 5.75% for the final three months of 2002 and was 6.25% for
the first nine months of 2002 and for the year 2001.Amortization of Policy Acquisition Costs and Operating ExpensesThe amortization of policy acquisition costs as a percentage of premium was
14% in 2003 compared to 11% in 2002 and 15% in 2001. Amortization for 2003
is within the Companys expected range of 12-14%. The amortization of policy
acquisition costs for 2002 reflects a favorable adjustment from updating
actuarial assumptions and a decrease in the annual interest rate credited to
policyholders. The adjustment represented a slow down of amortization as a
result of higher estimated future profits from the improvement in mortality
levels on universal life products. The after tax effect on net income for
2002 was $186,000 or $.03 per share. Amortization in 2001 reflects higher
lapses in the traditional lines of business which reflects increased term
rate competition in the market place.Operating expenses as a percentage of premiums were 26% for 2003 compared to
25% in 2002 and 28% in 2001. The increase in 2003 compared to 2002 reflects
normal increases in standard operating costs plus certain costs associated
with the anticipated merger with COUNTRY. These costs were anticipated by
management. The Company experienced some expense savings in 2002 primarily
due to the reduction of certain performance based compensation costs.Income Tax ExpenseThe effective tax rate for 2003 was 33% compared to 29% in 2002 and 27% in
2001. The four percentage point increase from 2002 to 2003 and the two
percentage point increase from 2002 to 2001 are the result of decreases in
the allowable small company deduction. 21




---



##### Table of Contents



Financial Condition  InvestmentsThe investment portfolios are managed based on the underlying characteristics
and nature of the Companys respective liabilities and within established
risk parameters. (For a further discussion of the Companys approach to
managing risks, see the Investment Credit Risk section in Item 7A.)The investment portfolios are managed by three non-affiliated investment
managers. Company management, under the direction of the Board of Directors,
is responsible for monitoring and managing the asset/liability profile,
establishing investment objectives and guidelines and determining, within
specified risk tolerances and investment guidelines, the appropriate asset
allocation, duration, convexity and other characteristics of the portfolios.
Security selection and monitoring are performed by the investment managers
asset class specialists working within dedicated portfolio management teams.The Companys primary investment objective is to maximize after-tax returns
consistent with acceptable risk parameters, including the management of the
interest rate sensitivity of invested assets and the generation of sufficient
liquidity relative to that of policyholder and corporate obligations.Return on invested assets is an important element of the Companys financial
results. Significant fluctuations in the fixed maturity or equity markets
could weaken the Companys financial condition or its results of operations.
Additionally, changes in market interest rates may impact the period of time
over which certain investments, such as mortgage-backed securities, are
repaid and whether certain investments are called by the issuers. Such
changes may, in turn, impact the yield on these investments and also may
result in reinvestment of funds received from calls and prepayments at rates
below the average portfolio yield. Net investment income and net realized
capital gains and losses accounted for approximately 21%, 23%, and 23% of the
Companys consolidated revenues for the years ended December 31, 2003, 2002
and 2001, respectively.Fluctuations in interest rates affect the Companys return on, and the fair
value of, fixed maturity investments, which comprised approximately 92% and
91% of the fair value of its invested assets as of December 31, 2003 and
2002, respectively. 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 identifies the invested assets by type held as of
December 31, 2003 and 2002 (dollars in thousands): 2003
    
    2002Amount
    
    Percent
    
    Amount
    
    PercentFixed maturities held for investment, at cost
    
    $
    3,348
    
    
    
    1.7
    
    
    $
    7,048
    
    
    
    4.0Fixed maturities available for sale, at fair value
    
    
    178,709
    
    
    
    90.4
    
    
    
    152,307
    
    
    
    87.4Equity securities, at fair value
    
    
    3,220
    
    
    
    1.6
    
    
    
    2,520
    
    
    
    1.4Mortgage loans, at cost
    
    
    1,028
    
    
    
    0.5
    
    
    
    1,320
    
    
    
    0.8Policy loans, at outstanding balance
    
    
    10,707
    
    
    
    5.4
    
    
    
    10,426
    
    
    
    6.0Other invested assets
    
    
    582
    
    
    
    0.4
    
    
    
    582
    
    
    
    0.4Total Investments
    
    $
    197,594
    
    
    
    100.0
    
    
    $
    174,203
    
    
    
    100.0
 22




---



##### Table of Contents



The following table provides information on the Companys fixed maturity
investments as of December 31 (dollars in thousands): 2003
    
    2002Carrying
    
    
    
    
    
    CarryingType of Investments
    
    Value
    
    Percent
    
    Value
    
    PercentFixed maturities, held for investment:Public utilities
    
    $
    1,848
    
    
    
    1.0
    
    
    $
    3,848
    
    
    
    2.4All other corporate bonds
    
    
    1,500
    
    
    
    0.8
    
    
    
    3,200
    
    
    
    2.0Total fixed maturities held for investment
    
    
    3,348
    
    
    
    1.8
    
    
    
    7,048
    
    
    
    4.4Fixed maturities, available for sale:United States government and government
agencies and authorities
    
    
    76,551
    
    
    
    42.1
    
    
    
    73,597
    
    
    
    46.2Foreign governments
    
    
    5,149
    
    
    
    2.8
    
    
    
    3,390
    
    
    
    2.1Public utilities
    
    
    4,145
    
    
    
    2.3
    
    
    
    7,492
    
    
    
    4.7All other corporate bonds
    
    
    92,864
    
    
    
    51.0
    
    
    
    67,828
    
    
    
    42.6Total fixed maturities available for sale
    
    
    178,709
    
    
    
    98.2
    
    
    
    152,307
    
    
    
    95.6Total fixed maturities
    
    $
    182,057
    
    
    
    100.0
    
    
    $
    159,355
    
    
    
    100.0
 The following table indicates by rating the composition of the Companys
fixed maturity securities portfolio at December 31 (dollars in thousands): 2003
    
    2002Carrying
    
    
    
    
    
    CarryingRatings (1)
    
    Value
    
    Percent
    
    Value
    
    PercentInvestment grade:U.S. Government and agencies
    
    $
    77,011
    
    
    
    42.3
    
    
    $
    61,830
    
    
    
    38.8AAA
    
    
    12,016
    
    
    
    6.6
    
    
    
    18,485
    
    
    
    11.6AA
    
    
    18,387
    
    
    
    10.1
    
    
    
    12,589
    
    
    
    7.9A
    
    
    51,158
    
    
    
    28.1
    
    
    
    47,328
    
    
    
    29.7BBB
    
    
    23,485
    
    
    
    12.9
    
    
    
    19,123
    
    
    
    12.0Total fixed maturity securities
    
    $
    182,057
    
    
    
    100.0
    
    
    $
    159,355
    
    
    
    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.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 23




---



##### Table of Contents



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.The following table identifies the Companys other-than-temporary impairments
by security type (pre-tax dollars in thousands): 2003
    
    2002
    
    2001Fixed maturity securities
    
    $
    
    
    
    $
    850
    
    
    $
    Equity securities
    
    
    356
    
    
    
    580
    
    
    
    Other invested assets
    
    
    
    
    
    
    418
    
    
    
    Total
    
    $
    356
    
    
    $
    1,848
    
    
    $
    
  Certain fixed maturity and equity securities were in an unrealized loss
position, where the Companys cost basis in the security exceeds the
securitys fair market value, at December 31, 2003. The following table
summarizes the length of time that those securities have been in a continuous
unrealized loss position as of December 31, 2003 (dollars in thousands): Less than 12 Months
    
    12 Months or Longer
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesFixed maturities, available for sale:U.S. Treasury securities and
obligations of U.S. government corporations and agencies
    
    $
    13,185
    
    
    $
    84
    
    
    $
    
    
    
    $
    
    
    
    $
    13,185
    
    
    $
    84Corporate securities
    
    
    15,908
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    15,908
    
    
    
    171Debt securities issued by foreign
governments
    
    
    2,969
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    2,969
    
    
    
    24Mortgage-backed securities
    
    
    9,658
    
    
    
    224
    
    
    
    282
    
    
    
    15
    
    
    
    9,940
    
    
    
    239Total fixed maturities, available for sale
    
    $
    41,720
    
    
    $
    503
    
    
    $
    282
    
    
    $
    15
    
    
    $
    42,002
    
    
    $
    518Equity securities
    
    $
    322
    
    
    $
    6
    
    
    $
    670
    
    
    $
    50
    
    
    $
    992
    
    
    $
    56
  As of December 31, 2003 there were no debt or equity securities whose
unrealized losses would be deemed by management to be other-than-temporary
impairments that have not been recorded.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. 24




---



##### Table of Contents



The geographic distribution of the loan portfolio is: Book ValueNumber of Loans
    
    
    
    
    (dollars in thousands)December 31,
    
    December 31,
    
    
    
    
    
    December 31,
    
    December 31,2003
    
    2002
    
    State
    
    2003
    
    20022
    
    
    
    2
    
    
    Alabama
    
    $
    91
    
    
    $
    1004
    
    
    
    6
    
    
    Florida
    
    
    180
    
    
    
    28323
    
    
    
    25
    
    
    Georgia
    
    
    757
    
    
    
    93729
    
    
    
    33
    
    
    
    
    
    
    $
    1,028
    
    
    $
    1,320
  Two loans representing $56,000 in principal are over 30 days delinquent. The
loan-to-value ratio on delinquent loans is 15%.Transaction with AffiliatesMutual, through its wholly owned subsidiary, Shield, controls approximately
33% of the Companys outstanding common stock. In addition, most of the
officers and directors of the Company hold similar positions with these
affiliates.Certain general expenses are allocated to the Company from its affiliates.
These expenses, such as salaries, advertising, rents, etc., represent the
Companys share of expenses initially paid by Mutual and are allocated based
on specific identification or, if undeterminable, generally on the basis of
each companys premium. Expenses allocated to the Company may not be the
same as expenses incurred if the Company operated as a stand-alone entity.
Expenditures allocated to the Company amounted to $3,704,114 in 2003,
$3,471,048 in 2002 and $3,992,556 in 2001. At December 31, 2003 the Company
owed $576,644 to Mutual and at December 31, 2002 the Company was owed $42,469
from Mutual.The Company expensed pension costs of $99,535 in 2003, $116,174 in 2002, and
$93,347 in 2001.Rent for use of software of $106,000 in 2003, 2002, and 2001, has been
charged to the affiliated companies. Liquidity and Capital Resources 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 $15.2 million, $17.0
million and $15.5 million in 2003, 2002 and 2001, respectively. Operating cash
flow is primarily used to purchase debt securities. The Company received
proceeds of $30.8 million from investment maturities and repayments in 2003,
adding to available cash flows. Such proceeds were $14.3 million in 2002 and
$10.5 million in 2001. 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, dispositions before maturity can vary significantly
from year to year. Proceeds from sales prior to maturity were $66.0 million in
2003, $108.6 million in 2002 and $50.4 million in 2001. 25




---



##### Table of Contents



Net cash flows used in investing activities totaled $23.6 million, $10.1
million and $7.7 million in 2003, 2002 and 2001, respectively. 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 $1.1 million in 2003, 2002,
and 2001. 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, payable 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 4.6 years as of
December 31, 2003, a 0.5 increase from 4.1 years as of December 31, 2002. The
increase in effective average duration resulted from the investment of
operating cash flows and investment maturities and sales proceeds in slightly
longer-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. Since 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 87% of the holdings at December 31,
2003 and 88% in
2002 are rated A or better by Standard & Poors Corporation. For all fixed
maturities, 13% in 2003 and 12% in 2002 are rated BBB. Ratings of BBB and
higher are considered investment grade by the rating services. Due to a
deterioration in bond market conditions, the Company experienced a decrease in
the unrealized gains on bonds of approximately $1,858,000 in 2003. The amortized cost and estimated fair value of debt securities at December 31,
2003, by contractual maturity, are shown on the following page. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. 26




---



##### Table of Contents



Amortized
    
    Estimatedcost
    
    fair valueHeld for investment:Due in one year or less
    
    $
    2,500,044
    
    
    $
    2,555,865Due after one year through five years
    
    
    848,329
    
    
    
    909,296Total
    
    
    3,348,373
    
    
    
    3,465,161Available for sale:Due in one year or less
    
    
    3,498,767
    
    
    
    3,553,510Due after one year through five years
    
    
    68,959,748
    
    
    
    70,240,806Due after five years through 10 years
    
    
    41,068,161
    
    
    
    43,020,226Due after 10 years
    
    
    21,921,712
    
    
    
    22,620,751Mortgage-backed securities
    
    

    38,970,898
    
    
    
    39,274,057Total
    
    $
    174,419,286
    
    
    $
    178,709,350
 
 ITEM 7A. 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 7 -
Managements Discussion and Analysis of Consolidated Financial Condition and
Results of Operations and Note 2 - Investments to the Companys Consolidated
Financial Statements.) 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. During periods
of significant interest rate volatility, the underlying mortgages 27




---



##### Table of Contents



may repay more quickly or more slowly than anticipated. If the repayment of
principal occurs earlier than anticipated during periods of declining interest
rates, investment income may decline due to the reinvestment of these funds at
the lower current market rates. 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. If the repayment
occurs later than expected during periods of increasing interest rates, the
cost of funds to pay liabilities may increase due to the mismatching of assets
and liabilities. 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. Hypothetical PercentageEstimated Fair Value
    
    Increase (Decrease) InEstimated Change
    
    After Hypothetical
    
    Shareholders EquityEstimated Value
    
    in Interest Rates
    
    Change in Interest
    
    (based on pre-taxDecember 31, 2003
    
    (bp-Basis Points)
    
    Rates
    
    amounts)(dollars in thousands)Fixed Maturities  Held
for Investment
    
    $
    3,465
    
    
    200 bp decrease
    
    $
    3,503
    
    
    
    N/A100 bp decrease
    
    
    3,475
    
    
    
    N/A100 bp increase
    
    
    3,455
    
    
    
    N/A200 bp increase
    
    
    3,444
    
    
    
    N/AFixed Maturities  Available for Sale
    
    $
    178,709
    
    
    200 bp decrease
    
    $
    194,238
    
    
    
    18.1
    %100 bp decrease
    
    
    186,394
    
    
    
    9.0
    %100 bp increase
    
    
    171,183
    
    
    
    (8.8
    )%200 bp increase
    
    
    163,657
    
    
    
    (17.6
    )%
 The following table shows a comparison of average assumed interest rates for
policy reserves and investment yields, based on amortized costs, for the three
years ended December 31. Comparison of Interest Rates for Policy Reservesand Investment Yields(Net of investment expenses) 2003
    
    2002
    
    2001Policies issued during year:Required interest on policy reserves
    
    
    6.2
    %
    
    
    6.5
    %
    
    
    6.7
    %New money yield on investments
    
    
    4.0
    %
    
    
    4.5
    %
    
    
    5.4
    %Policies inforce during year:Required interest on policy reserves
    
    
    5.6
    %
    
    
    6.1
    %
    
    
    6.2
    %Net investment yield
    
    
    5.0
    %
    
    
    6.0
    %
    
    
    6.7
    %
 In 2002 and 2003, the Companys net investment yield was less than the average
interest rate required for reserves. However, reserves are set using many
variables other than net investment yield, including mortality, lapse
assumptions, average policy size, etc. The margin between gross premiums
received less the premium required to establish reserves is still sufficient to
cover future reserve increases, claim costs, maintenance expenses, and DAC
amortization. 28




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
 COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets December 31,2003
    
    2002AssetsInvestments:Fixed maturities, held for investment, at amortized
cost (fair value of $3,465,161 in 2003 and $7,324,373 in 2002)
    
    $
    3,348,373
    
    
    
    7,048,175Fixed maturities, available for sale, at fair value (amortized
cost of $174,419,286 in 2003 and $146,159,339 in 2002)
    
    
    178,709,350
    
    
    
    152,307,406Equity securities, at fair value (cost of $2,752,977 in 2003
and $2,984,720 in 2002)
    
    
    3,219,429
    
    
    
    2,519,895First mortgage loans on real estate
    
    
    1,028,395
    
    
    
    1,320,330Policy loans
    
    
    10,706,565
    
    
    
    10,425,612Other invested assets
    
    
    582,000
    
    
    
    582,000Total investments
    
    
    197,594,112
    
    
    
    174,203,418Cash and cash equivalents
    
    
    9,456,873
    
    
    
    18,913,861Accrued investment income
    
    
    2,548,049
    
    
    
    2,406,298Amounts receivable, principally premiums
    
    
    4,869,767
    
    
    
    3,777,671Amount due from reinsurers
    
    
    4,531,625
    
    
    
    4,263,828Deferred policy acquisition costs
    
    
    63,767,550
    
    
    
    57,686,410Federal income tax receivable
    
    
    633,853
    
    
    
    98,457Other assets
    
    
    370,543
    
    
    
    460,061$
    283,772,372
    
    
    
    261,810,004Liabilities and Shareholders EquityPolicy liabilities and accruals:Future policy benefits
    
    $
    175,077,154
    
    
    
    160,424,107Policy claims and benefits payable
    
    
    3,527,042
    
    
    
    3,241,343Total policy liabilities and accruals
    
    
    178,604,196
    
    
    
    163,665,450Federal income taxes:Current
    
    
    
    
    
    
    Deferred
    
    
    12,101,542
    
    
    
    11,181,184Total Federal income taxes
    
    
    12,101,542
    
    
    
    11,181,184Other liabilities
    
    
    7,457,520
    
    
    
    5,592,961Total liabilities
    
    
    198,163,258
    
    
    
    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
    
    
    4,160,213
    
    
    
    3,434,018Accumulated other comprehensive income, net of tax
    
    
    2,708,616
    
    
    
    3,226,975Retained earnings
    
    
    76,297,876
    
    
    
    72,035,550Less:Unearned compensation - restricted stock
    
    
    (996,858
    )
    
    
    (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
    
    
    85,609,114
    
    
    
    81,370,409$
    283,772,372
    
    
    
    261,810,004
 See accompanying notes to consolidated financial statements. 29




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings Years ended December 31,2003
    
    2002
    
    2001Revenue:Premiums
    
    $
    35,882,106
    
    
    
    33,092,092
    
    
    
    30,220,737Net investment income
    
    
    8,950,730
    
    
    
    9,828,964
    
    
    
    10,282,623Realized investment gains
    
    
    1,837,843
    
    
    
    1,036,704
    
    
    
    27,501Brokerage commissions
    
    
    4,906,455
    
    
    
    4,242,470
    
    
    
    4,190,482Total revenue
    
    
    51,577,134
    
    
    
    48,200,230
    
    
    
    44,721,343Benefits and expenses:Benefits and claims
    
    
    23,479,173
    
    
    
    20,117,169
    
    
    
    17,551,824Interest credited
    
    
    5,912,341
    
    
    
    5,904,423
    
    
    
    5,527,001Amortization of deferred policy acquisition costs
    
    
    5,092,004
    
    
    
    3,760,985
    
    
    
    4,466,712Operating expenses
    
    
    9,250,205
    
    
    
    8,147,908
    
    
    
    8,311,250Total benefits and
expenses
    
    
    43,733,723
    
    
    
    37,930,485
    
    
    
    35,856,787Income before Federal income taxes
    
    
    7,843,411
    
    
    
    10,269,745
    
    
    
    8,864,556Federal income taxes:Current
    
    
    1,325,665
    
    
    
    1,421,156
    
    
    
    1,461,027Deferred
    
    
    1,235,445
    
    
    
    1,539,715
    
    
    
    957,857Total Federal income
taxes
    
    
    2,561,110
    
    
    
    2,960,871
    
    
    
    2,418,884Net income
    
    $
    5,282,301
    
    
    
    7,308,874
    
    
    
    6,445,672Basic income per share of
common stock
    
    $
    0.84
    
    
    
    1.15
    
    
    
    1.02Diluted income per share of
common stock
    
    $
    0.80
    
    
    
    1.13
    
    
    
    0.99Weighted-average number of shares used in
computing income per share:Basic
    
    
    6,323,526
    
    
    
    6,337,387
    
    
    
    6,342,817Diluted
    
    
    6,631,886
    
    
    
    6,494,667
    
    
    
    6,519,933
 See accompanying notes to consolidated financial statements. 30




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity Years ended December 31,2003
    
    2002
    
    2001Common stock:Balance at beginning of year
    
    $
    6,929,347
    
    
    
    6,917,722
    
    
    
    6,870,283Restricted stock activity, net
    
    
    57,984
    
    
    
    11,625
    
    
    
    47,439Balance at end of year
    
    
    6,987,331
    
    
    
    6,929,347
    
    
    
    6,917,722Additional paid-in capital:Balance at beginning of year
    
    
    3,434,018
    
    
    
    3,443,995
    
    
    
    2,917,628Treasury shares issued
    
    
    
    
    
    
    16,227
    
    
    
    Compensatory directors stock options granted
    
    
    79,100
    
    
    
    94,500
    
    
    
    84,575Restricted stock activity, net
    
    
    647,095
    
    
    
    (147,942
    )
    
    
    441,792Tax benefit arising from issuance of
restricted stock
    
    
    
    
    
    
    27,238
    
    
    
    Balance at end of year
    
    
    4,160,213
    
    
    
    3,434,018
    
    
    
    3,443,995Accumulated other comprehensive income (loss):Balance at beginning of year
    
    
    3,226,975
    
    
    
    818,720
    
    
    
    (1,715,931
    )Change in unrealized gains:Unrealized (losses) gains during year
    
    
    (926,726
    )
    
    
    4,224,171
    
    
    
    4,582,686Deferred taxes
    
    
    315,087
    
    
    
    (1,436,218
    )
    
    
    (1,558,113
    )Deferred acquisition cost adjustment
    
    
    93,280
    
    
    
    (379,698
    )
    
    
    (489,922
    )Other comprehensive (loss) income
    
    
    (518,359
    )
    
    
    2,408,255
    
    
    
    2,534,651Balance at end of year
    
    
    2,708,616
    
    
    
    3,226,975
    
    
    
    818,720Retained earnings:Balance at beginning of year
    
    
    72,035,550
    
    
    
    65,746,656
    
    
    
    60,320,092Net income
    
    
    5,282,301
    
    
    
    7,308,874
    
    
    
    6,445,672Dividends of $.16 per share in 2003,
2002, and 2001
    
    
    (1,019,975
    )
    
    
    (1,019,980
    )
    
    
    (1,019,108
    )Balance at end of year
    
    
    76,297,876
    
    
    
    72,035,550
    
    
    
    65,746,656Unearned compensation - restricted stock:Balance at beginning of year
    
    
    (764,543
    )
    
    
    (858,781
    )
    
    
    (794,276
    )Shares awarded
    
    
    (705,079
    )
    
    
    (463,920
    )
    
    
    (489,231
    )Shares forfeited
    
    
    
    
    
    
    506,605
    
    
    
    Compensation expense recorded
    
    
    472,764
    
    
    
    51,553
    
    
    
    424,726Balance at end of year
    
    
    (996,858
    )
    
    
    (764,543
    )
    
    
    (858,781
    )Treasury stock:Balance at beginning of year
    
    
    (3,490,938
    )
    
    
    (3,422,994
    )
    
    
    (3,326,927
    )Cost of shares purchased (6,000 shares in 2003,
12,100 shares in 2002 and 10,000 shares in 2001)
    
    
    (57,126
    )
    
    
    (116,949
    )
    
    
    (96,067
    )Cost of shares issued (0 shares in 2003, 5,409 shares in
2002 and 0 shares in 2001)
    
    
    
    
    
    
    49,005
    
    
    
    Balance at end of year
    
    
    (3,548,064
    )
    
    
    (3,490,938
    )
    
    
    (3,422,994
    )Total shareholders equity
    
    $
    85,609,114
    
    
    
    81,370,409
    
    
    
    72,645,318
 See accompanying notes to consolidated financial statements. 31




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows Years ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    5,282,301
    
    
    
    7,308,874
    
    
    
    6,445,672Adjustments to reconcile net income to net
cash provided by operating activities:Realized investment gains
    
    
    (1,837,843
    )
    
    
    (1,036,704
    )
    
    
    (27,501
    )Increase in policy liabilities and accruals
    
    
    14,938,746
    
    
    
    15,731,520
    
    
    
    12,981,119(Increase) in deferred policy acquisition costs
    
    
    (5,987,859
    )
    
    
    (6,405,300
    )
    
    
    (5,294,025
    )Change in liability for income taxes
    
    
    700,049
    
    
    
    1,135,872
    
    
    
    713,591(Increase) decrease in amounts receivable
and amount due from reinsurers
    
    
    (1,359,893
    )
    
    
    (510,401
    )
    
    
    161,724Depreciation expense
    
    
    131,516
    
    
    
    217,418
    
    
    
    228,616Amortization of premium on fixed-income securities
    
    
    1,038,378
    
    
    
    314,579
    
    
    
    94,470Stock-based compensation expense, net
    
    
    551,864
    
    
    
    38,673
    
    
    
    519,239Increase (decrease) in payable to affiliates
    
    
    619,114
    
    
    
    (228,952
    )
    
    
    (207,444
    )Other, net
    
    
    1,103,691
    
    
    
    424,357
    
    
    
    (77,025
    )Net cash provided by operating
activities
    
    
    15,180,064
    
    
    
    16,989,936
    
    
    
    15,538,436Cash flows from investing activities:Purchase of fixed maturities available for sale
    
    
    (120,233,439
    )
    
    
    (132,315,381
    )
    
    
    (67,827,757
    )Purchase of equity securities
    
    
    (743,596
    )
    
    
    (1,412,058
    )
    
    
    (1,972,576
    )Sales of fixed maturities held for investment
    
    
    
    
    
    
    450,000
    
    
    
    Sale of fixed maturities available for sale
    
    
    65,969,712
    
    
    
    108,146,942
    
    
    
    50,369,530Sale of equity securities
    
    
    724,135
    
    
    
    1,319,439
    
    
    
    1,832,149Proceeds from maturities of fixed maturities
held for investment
    
    
    3,700,000
    
    
    
    4,000,000
    
    
    
    3,500,000Proceeds from maturity and redemption of
fixed maturities available for sale
    
    
    27,054,253
    
    
    
    10,322,348
    
    
    
    7,043,398First mortgage loans originated
    
    
    
    
    
    
    (193,600
    )
    
    
    Principal collected on first mortgage loans
    
    
    291,935
    
    
    
    511,521
    
    
    
    425,627Net increase in policy loans
    
    
    (280,953
    )
    
    
    (764,365
    )
    
    
    (820,239
    )Other, net
    
    
    (41,998
    )
    
    
    (191,593
    )
    
    
    (223,696
    )Net cash used in investing activities
    
    
    (23,559,951
    )
    
    
    (10,126,747
    )
    
    
    (7,673,564
    )Cash flows from financing activities:Cash dividends paid
    
    
    (1,019,975
    )
    
    
    (1,019,980
    )
    
    
    (1,019,108
    )Purchase of treasury stock
    
    
    (57,126
    )
    
    
    (116,949
    )
    
    
    (96,067
    )Net cash used in financing activities
    
    
    (1,077,101
    )
    
    
    (1,136,929
    )
    
    
    (1,115,175
    )Net (decrease) increase in cash and
cash equivalents
    
    
    (9,456,988
    )
    
    
    5,726,260
    
    
    
    6,749,697Cash and cash equivalents:Beginning of year
    
    
    18,913,861
    
    
    
    13,187,601
    
    
    
    6,437,904End of year
    
    $
    9,456,873
    
    
    
    18,913,861
    
    
    
    13,187,601Supplemental disclosures of cash paid during
the year  income taxes
    
    $
    1,930,000
    
    
    
    1,825,000
    
    
    
    1,705,292
 See accompanying notes to consolidated financial statements. 32




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income Years ended December 31,2003
    
    2002
    
    2001Net income
    
    $
    5,282,301
    
    
    
    7,308,874
    
    
    
    6,445,672Other comprehensive income before tax:Unrealized gains on securities

available for sale
    
    
    1,004,399
    
    
    
    4,881,177
    
    
    
    4,120,265Reclassification adjustment for realized gains included in net earnings
    
    
    (1,837,845
    )
    
    
    (1,036,704
    )
    
    
    (27,501
    )Total other comprehensive (loss) income
before tax
    
    
    (833,446
    )
    
    
    3,844,473
    
    
    
    4,092,764Income tax (benefit) expense related to items
of other comprehensive (loss) income
    
    
    (315,087
    )
    
    
    1,436,218
    
    
    
    1,558,113Other comprehensive (loss) income,
net of tax
    
    
    (518,359
    )
    
    
    2,408,255
    
    
    
    2,534,651Total comprehensive income
    
    $
    4,763,942
    
    
    
    9,717,129
    
    
    
    8,980,323
 See accompanying notes to consolidated financial statements. 33




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  (1)
    
    Summary of Significant Accounting PoliciesCotton States Life Insurance Company (the Company) was organized under
the laws of the State of Georgia in 1955. The Company is currently
licensed to transact business in Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and
Virginia. The Company currently markets only individual life insurance,
payroll deduction life insurance, guaranteed issue and simplified issue
life insurance and individual annuities.In July of 1989, the Company formed CSI Brokerage Services, Inc. (CSI).
CSI brokers insurance products for the Companys exclusive agents not
offered by the Companys affiliated property and casualty companies.In November of 1989, the Company acquired 60% of the outstanding common
stock of Cotton States Marketing Resources, Inc. (CSMR). During 1992,
the Company acquired the remaining 40% of CSMRs stock. CSMR brokers
through the Companys exclusive agents other insurance companies life and
accident and health products not underwritten by the Company.On February 21, 2002, the Company filed notice of its intent to withdraw
its multi-line exclusive agents from Kentucky primarily due to losses
incurred by the Companys affiliate, Cotton States Mutual Insurance
Company. Without objection from the Kentucky Department of Insurance, the
Companys withdrawal plan was accepted pursuant to Kentucky insurance
regulations.It was announced on December 30, 2003 that the Cotton States Insurance
Group (which includes the Company and Cotton States Mutual Insurance
Company) 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 during the second quarter of 2004.The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America (GAAP), which vary in certain respects from reporting
practices prescribed or permitted by the Insurance Department of the State
of Georgia. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Amounts that the Company deems to be
most sensitive to changes in estimates include deferred policy acquisition
costs, future policy benefits, income taxes, and impairments as they relate
to investments. In addition, the Company must determine requirements for
disclosure of contingent assets and liabilities as of the date of the
financial statements based upon estimates. In all instances, actual
results could differ from estimates.The significant accounting policies are as follows:  Consolidation PolicyThe consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiaries, CSI and CSMR. All
significant intercompany balances and transactions have been eliminated
in consolidation. 34




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  Recognition of Premiums and Brokerage IncomePremiums on life and accident and health insurance policies are
recognized as income when due. Premiums on universal life policies are
recognized as income when deducted from the policys account value.CSI and CSMR receive commissions on insurance policies written by the
Companys agents on behalf of unaffiliated insurance companies. This
income is recognized when the related insurance policies are written as
reported by the insurance companies with which the business is placed.Future Policy BenefitsFuture policy benefits on life insurance policies are computed using a
net level premium method based upon various assumptions as to
investment yields, withdrawals, morbidity, and mortality. Future
policy benefits on universal life insurance policies and annuities
represent the contracts accumulated account value.ReinsuranceReinsurance premiums and benefits paid or provided are accounted for on
a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.Deferred Policy Acquisition CostsThe costs of acquiring most new life business are deferred and
amortized with interest over the premium-paying period of the related
policies. For individual life policies, such amounts are amortized in
proportion to the ratio of the annual premium income to the total
anticipated premium income. Such anticipated premium income is
estimated using the same assumptions used for computing future policy
benefits. For universal life policies, deferrable costs are amortized
in proportion to the ratio of the contracts annual gross profits to
total anticipated gross profits. First-year excess expense charges are
also deferred and accreted to income in the same manner as deferrable
costs are amortized. Total anticipated gross profits are based on
assumptions for investment margins, surrender charges, mortality
charges, and level expense loads. The principal expenses deferred are
commissions and certain expenses of the product development, policy
issue, underwriting, and agency departments, all of which vary with and
are primarily related to the production of new business. Policy
acquisition costs deferred were approximately $11,064,000 in 2003,
$10,215,000 in 2002, and $9,831,000 in 2001.Cash and Cash EquivalentsFor purposes of presenting its statements of cash flows, the Company
considers all short-term investments to be cash equivalents.
Short-term investments have original maturity dates of less than three
months.InvestmentsThe Company accounts for investments under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115,
Accounting for
Certain Investments in Debt and Equity Securities. 35




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  Fixed maturities held for investment are stated at amortized cost.
Fixed maturities available for sale are stated at fair value. The cost
of securities sold is determined by the specific identification method.
First mortgage loans are stated at their aggregate unpaid balance.
Policy loans are stated at their aggregate unpaid balance and
short-term investments are stated at cost.Investments deemed to have a loss in value which is
other-than-temporary are written down to their fair value. Unrealized
gains and losses on fixed maturities available for sale are excluded
from earnings and are reported within shareholders equity as a
component of accumulated other comprehensive income, net of deferred
taxes and amounts attributable to the Companys universal life and
annuity products.Income TaxesThe Company, CSI, and CSMR file a consolidated federal income tax
return. Income tax expense allocation is based upon separate return
calculations with credit for current losses. Inter-company balances
are settled annually.Deferred taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.Stock Based CompensationThe Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for its stock based compensation. As such, compensation
expense would generally only be recorded if the current market price of
the underlying stock on the date of grant exceeded the exercise price.Earnings Per ShareThe following table summarizes information relating to the calculation
of basic and diluted earnings per share of common stock: Years ended December 31,2003
    
    2002
    
    2001Income
    
    Shares
    
    Income
    
    Shares
    
    Income
    
    Shares(Numerator)
    
    (Denominator)
    
    (Numerator)
    
    (Denominator)
    
    (Numerator)
    
    (Denominator)Data for Basic EPS
calculation
    
    $
    5,282,301
    
    
    
    6,323,526
    
    
    $
    7,308,874
    
    
    
    6,337,387
    
    
    $
    6,445,672
    
    
    
    6,342,817Effect of
dilutive
securities:Options
    
    
    
    
    
    
    75,533
    
    
    
    
    
    
    
    1,239
    
    
    
    
    
    
    
    13,898Restricted
stock
    
    
    
    
    
    
    232,827
    
    
    
    
    
    
    
    156,041
    
    
    
    
    
    
    
    163,218Data for Diluted
EPS calculation
    
    $
    5,282,301
    
    
    
    6,631,886
    
    
    $
    7,308,874
    
    
    
    6,494,667
    
    
    $
    6,445,672
    
    
    
    6,519,933
  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 36




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  affect the Companys results of operations or financial position. The
Company has complied with the disclosure requirements of SFAS No. 148
in these 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 financial statements issued for periods ending after December 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.In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 addresses certain financial instruments that,
under previous guidelines, could be accounted for as equity, but now
must be classified as liabilities in the statement of financial
position. These financial instruments include: 1) mandatorily
redeemable financial instruments, 2) obligations to repurchase the
issuers equity shares by transferring assets, and 3) obligations to
issue a variable number of shares. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The implementation of SFAS No. 150 did
not have an impact on the Companys consolidated financial statements.  (2)
    
    InvestmentsThe amortized cost and estimated fair values of investments in debt and
equity securities as of December 31, 2003 and 2002 are as follows: 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    valueHeld for investment:Corporate securities
    
    $
    3,348,373
    
    
    
    116,788
    
    
    
    
    
    
    
    3,465,161Available for sale:U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
    
    $
    36,392,306
    
    
    
    968,586
    
    
    
    84,250
    
    
    
    37,276,642Corporate securities
    
    
    93,930,859
    
    
    
    3,248,739
    
    
    
    170,607
    
    
    
    97,008,991Debt securities issued by
foreign governments
    
    
    5,125,223
    
    
    
    48,734
    
    
    
    24,297
    
    
    
    5,149,660Mortgage-backed securities
    
    
    38,970,898
    
    
    
    542,474
    
    
    
    239,315
    
    
    
    39,274,057Total
    
    $
    174,419,286
    
    
    
    4,808,533
    
    
    
    518,469
    
    
    
    178,709,350Equity securities
    
    $
    2,752,977
    
    
    
    522,360
    
    
    
    55,908
    
    
    
    3,219,429
 37




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 2002Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    faircost
    
    gains
    
    losses
    
    valueHeld for investment:Corporate securities
    
    $
    7,048,175
    
    
    
    276,198
    
    
    
    
    
    
    
    7,324,373Available for sale:U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
    
    $
    38,462,349
    
    
    
    1,974,989
    
    
    
    594
    
    
    
    40,436,744Corporate securities
    
    
    72,424,094
    
    
    
    3,086,079
    
    
    
    190,280
    
    
    
    75,319,893Debt securities issued by
foreign governments
    
    
    3,391,946
    
    
    
    23,042
    
    
    
    24,807
    
    
    
    3,390,181Mortgage-backed securities
    
    
    31,880,950
    
    
    
    1,313,426
    
    
    
    33,788
    
    
    
    33,160,588Total
    
    $
    146,159,339
    
    
    
    6,397,536
    
    
    
    249,469
    
    
    
    152,307,406Equity securities
    
    $
    2,984,720
    
    
    
    22,405
    
    
    
    487,230
    
    
    
    2,519,895
  Certain fixed maturity and equity securities were in an unrealized loss
position, where the Companys cost basis in the security exceeds the
securitys fair market value, at December 31, 2003. The following table
summarizes the length of time that those securities have been in a
continuous unrealized loss position as of December 31, 2003: Less than 12 Months
    
    12 Months or Longer
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesAvailable for sale:U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
    
    $
    13,184,647
    
    
    
    84,250
    
    
    
    
    
    
    
    
    
    
    
    13,184,647
    
    
    
    84,250Corporate securities
    
    
    15,907,578
    
    
    
    170,607
    
    
    
    
    
    
    
    
    
    
    
    15,907,578
    
    
    
    170,607Debt securities issued by
foreign governments
    
    
    2,968,870
    
    
    
    24,297
    
    
    
    
    
    
    
    
    
    
    
    2,968,870
    
    
    
    24,297Mortgage-backed securities
    
    
    9,658,334
    
    
    
    223,678
    
    
    
    282,178
    
    
    
    15,637
    
    
    
    9,940,512
    
    
    
    239,315Total
    
    $
    41,719,429
    
    
    
    502,832
    
    
    
    282,178
    
    
    
    15,637
    
    
    
    42,001,607
    
    
    
    518,469Equity securities
    
    $
    321,717
    
    
    
    6,329
    
    
    
    669,903
    
    
    
    49,579
    
    
    
    991,620
    
    
    
    55,908
  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 the length of time the security has been below a predetermined
percentage of cost. Monthly discussions are held with the 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 December 31, 2003 there were no debt or equity securities
whose unrealized losses would be deemed by management to be
other-than-temporary impairments that have not been recorded.The amortized cost and estimated fair value of debt securities at December
31, 2003, by contractual maturity, are shown on the following page.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. 38




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 Amortized
    
    Estimatedcost
    
    fair valueHeld for investment:Due in one year or less
    
    $
    2,500,044
    
    
    
    2,555,865Due after one year through five years
    
    
    848,329
    
    
    
    909,296Total
    
    $
    3,348,373
    
    
    
    3,465,161Available for sale:Due in one year or less
    
    $
    3,498,767
    
    
    
    3,553,510Due after one year through five years
    
    
    68,959,748
    
    
    
    70,240,806Due after five years through 10 years
    
    
    41,068,161
    
    
    
    43,020,226Due after 10 years
    
    
    21,921,712
    
    
    
    22,620,751Mortgage-backed securities
    
    
    38,970,898
    
    
    
    39,274,057Total
    
    $
    174,419,286
    
    
    
    178,709,350
  Bonds with an amortized cost of $2,177,000 and $1,914,000 at December 31,
2003 and 2002, respectively, were on deposit with state insurance
regulatory authorities in accordance with statutory requirements.Realized and unrealized gains and losses on investments for the years ended
December 31 were as follows: 2003
    
    2002
    
    2001Realized gains (losses) on sales, redemptions,
and impairment of investments:Fixed maturities held for investment:Gross losses:
    
    $
    
    
    
    
    (49,768
    )
    
    
    Fixed maturities available for sale:Gross gains
    
    
    2,331,433
    
    
    
    3,921,917
    
    
    
    874,785Gross losses
    
    
    (242,386
    )
    
    
    (1,602,144
    )
    
    
    (709,279
    )Net realized gains
    
    
    2,089,047
    
    
    
    2,319,773
    
    
    
    165,506Equity securities:Gross gains
    
    
    128,859
    
    
    
    158,032
    
    
    
    218,976Gross losses
    
    
    (380,063
    )
    
    
    (939,595
    )
    
    
    (356,981
    )Net realized (losses)
    
    
    (251,204
    )
    
    
    (781,563
    )
    
    
    (138,005
    )Net realized losses on other invested assets
    
    
    
    
    
    
    (451,738
    )
    
    
    Total
    
    
    1,837,843
    
    
    
    1,036,704
    
    
    
    27,501Changes in unrealized gains (losses):Fixed maturities held for investment
    
    
    (159,409
    )
    
    
    (131,706
    )
    
    
    251,068Fixed maturities available for sale
    
    
    (1,858,004
    )
    
    
    4,487,058
    
    
    
    4,889,813Equity securities
    
    
    931,277
    
    
    
    (262,887
    )
    
    
    (307,128
    )Net unrealized (losses) gains
    
    
    (1,086,136
    )
    
    
    4,092,465
    
    
    
    4,833,753Total realized and unrealized gains
    
    $
    751,707
    
    
    
    5,129,169
    
    
    
    4,861,254
  During 2002 the Company sold a security out of its held-to-maturity
portfolio due to evidence of a significant deterioration in the issuers
creditworthiness. At the time of sale the security had an amortized cost
of $499,768. The Company realized a loss of $49,768 on the transaction. 39




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  Details of net investment income are as follows: 2003
    
    2002
    
    2001Investment income:Fixed maturities held for investment
    
    $
    316,315
    
    
    
    670,907
    
    
    
    923,838Fixed maturities available for sale
    
    
    7,911,200
    
    
    
    8,481,253
    
    
    
    8,405,376Equity securities
    
    
    44,263
    
    
    
    42,756
    
    
    
    44,357First mortgage loans
    
    
    95,206
    
    
    
    120,653
    
    
    
    166,808Policy loans
    
    
    769,469
    
    
    
    742,616
    
    
    
    675,825Short-term investments
    
    
    162,457
    
    
    
    166,125
    
    
    
    296,987Total investment income
    
    
    9,298,910
    
    
    
    10,224,310
    
    
    
    10,513,191Less investment expenses
    
    
    348,180
    
    
    
    395,346
    
    
    
    230,568Net investment income
    
    $
    8,950,730
    
    
    
    9,828,964
    
    
    
    10,282,623
  (3)
    
    Disclosures about Fair Value of Financial InstrumentsThe following methods and assumptions were used to estimate the fair value
of each class of financial instruments:  Cash and Short-Term InvestmentsThe carrying amount of cash and short-term investments is a reasonable
estimate of fair value due to the short-term nature of the investments.Investment SecuritiesFor investment securities (which include fixed maturities held for
investment, fixed maturities available for sale, and equity
securities), fair values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.Mortgage LoansThe fair value of mortgage loans is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences
in loan characteristics.Policy LoansThe carrying amount of policy loans is a reasonable estimate of fair
value.Universal Life and Annuity BenefitsThe carrying amount of universal life and annuity benefits is a
reasonable estimate of fair value since credited interest approximates
current market rates. 40




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  The estimated fair values and carrying values of the Companys
financial instruments at December 31, 2003 and 2002 are the same except
for investment securities which are detailed in footnote 2 and mortgage
loans as follows: Mortgage loansCarrying
    
    Fairamount
    
    value2003
    
    $
    1,028,395
    
    
    $
    1,057,6252002
    
    
    1,320,330
    
    
    
    1,405,337
  (4)
    
    Future Policy Benefits and ReinsuranceThe composition of future policy benefits, and the significant assumptions
used in their development, are as follows (dollars in thousands): Future policy
benefits
    
    AssumptionsYearsLine of business
    
    2003
    
    2002
    
    of issue
    
    Interest rates
    
    Mortality
    
    WithdrawalsLife:Individual
    
    $
    3,384
    
    
    
    3,454
    
    
    l956-65
    
    4%
    
    l955-60 Basic TableSelect and Ultimate
    
    CompanyexperienceIndividual
    
    
    7,797
    
    
    
    7,851
    
    
    l966-79
    
    6.5% - 5% (A)
    
    Same as above
    
    Same as aboveIndividual
    
    
    5,039
    
    
    
    5,109
    
    
    l980-88
    
    7.5% -  6% (A)
    
    l965-70 Basic TableSelect and Ultimate
    
    Same as aboveIndividual
    
    
    37,734
    
    
    
    31,472
    
    
    1989-03
    

7.5% - 6% (A)
    
    1975-80 Basic TableSelect and Ultimate
    
    Same as aboveIndividual
    
    
    5,779
    
    
    
    5,275
    
    
    Various
    
    3.5% -  2.5%
    
    Statutory
    
    Same as aboveAnnuities and
universal life
    
    
    115,312
    
    
    
    107,230
    
    
    Various
    
    6.25% - 4.5%
    
    Accumulatedaccount value
    
    Same as aboveGroup
    
    
    5
    
    
    
    5
    
    
    Various
    
    
    
    Unearned premiums
    
    175,050
    
    
    
    160,396Accident and health
 Individual
    
    
    27
    
    
    
    28
    
    
    Various
    
    3%
    
    
    
    Total future
policy
benefits
    
    $
    175,077
    
    
    
    160,424
  (A)
    
    Interest rates are graded to the ultimate rate in 25 years. The Company participates in certain business assumed from federally
sponsored group pools. Further, it is the Companys general policy to
reinsure individual life insurance in excess of $100,000, group
life insurance in excess of $55,000, major medical payments in excess of
$85,000 annually per individual, accidental deaths, and certain disability
income coverage. 41




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  The Company utilizes reinsurance agreements to reduce its exposure to large
losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of large losses from reinsurers, although it does not
discharge the primary liability of the Company as direct insurer of the
risks insured. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of reinsurers.
Only those reinsurance recoverable balances deemed probable of recovery are
reflected as assets on the Companys consolidated balance sheets. Amounts
ceded under reinsurance agreements become liabilities of the Company should
the reinsurers be unable to meet their obligations under the reinsurance
agreements.The effect of reinsurance assumed and ceded on certain financial statement
accounts is as follows: 2003
    
    2002
    
    2001Premiums:Direct premiums
    
    $
    39,162,554
    
    
    
    36,441,773
    
    
    
    33,660,529Reinsurance assumed
    
    
    1,451,886
    
    
    
    1,201,107
    
    
    
    923,435Reinsurance ceded
    
    
    (4,732,334
    )
    
    
    (4,550,788
    )
    
    
    (4,363,227
    )Net premiums
    
    $
    35,882,106
    
    
    
    33,092,092
    
    
    
    30,220,737Benefits and claims:Reinsurance assumed
    
    $
    1,425,430
    
    
    
    1,180,846
    
    
    
    903,187Reinsurance ceded
    
    $
    4,501,461
    
    
    
    3,360,986
    
    
    
    4,774,926
  (5)
    
    Income TaxesDeferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial
reporting purposes and federal income tax purposes. The net deferred tax
liability at December 31, 2003 and 2002 is composed of the tax-effected
temporary differences related to the following amounts: 2003
    
    2002Deferred tax assets:Equity securities
    
    $
    16,124
    
    
    
    355,424Life insurance reserves
    
    
    6,558,422
    
    
    
    6,398,237Unearned mortality and expense charges
    
    
    866,808
    
    
    
    877,807Postretirement health benefits liability
    
    
    67,483
    
    
    
    73,025Deferred compensation
    
    
    668,891
    
    
    
    438,834Other, net
    
    
    471,812
    
    
    
    290,351Total deferred tax assets
    
    
    8,649,540
    
    
    
    8,433,678Deferred tax liabilities:Fixed maturities available for sale
    
    
    1,458,622
    
    
    
    2,090,343Deferred policy acquisition costs
    
    
    19,125,942
    
    
    
    17,360,463Due and unpaid premiums
    
    
    141,889
    
    
    
    118,501Other, net
    
    
    24,629
    
    
    
    45,555Total deferred tax liabilities
    
    
    20,751,082
    
    
    
    19,614,862Net deferred tax liability
    
    $
    12,101,542
    
    
    
    11,181,184
  SFAS No. 109, Accounting for Income Taxes, specifically identifies certain
temporary differences for which deferred tax liabilities are not recognized
unless it becomes apparent that those temporary
differences will reverse in the foreseeable future. The Company has not
recorded a deferred tax liability for one such item entitled
policyholders surplus created by federal income tax regulations in
effect prior to 1984. Certain untaxed income accumulated in this special
memorandum tax account 42




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  will become taxable if distributions, other than
stock dividends, are made in excess of certain amounts accumulated in
another special memorandum tax account entitled shareholders surplus.
The balance in the policyholders surplus account at December 31, 2003
was $58,492,000. The balance in the shareholders surplus account at
December 31, 2003 was $4,203,000. The Company does not anticipate any of
the policyholders surplus account becoming taxable in the foreseeable
future.  In assessing the deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Management has concluded that it is
more likely than not that all of its deferred tax assets are realizable.
Therefore, no valuation allowance was established at December 31, 2003 and
2002.  Federal income tax expense is less than amounts determined by multiplying
earnings before federal income taxes by the federal tax rate of 35%. The
reasons for such difference and the tax effect of each are as follows: 2003
    
    2002
    
    2001Federal income tax expense at
statutory rate
    
    $
    2,745,194
    
    
    
    3,594,411
    
    
    
    3,102,595Special deduction available to small
life insurance companies
    
    
    (167,444
    )
    
    
    (608,987
    )
    
    
    (611,156
    )Surtax exemption
    
    
    (39,741
    )
    
    
    (49,546
    )
    
    
    (71,184
    )Other, net
    
    
    23,101
    
    
    
    24,993
    
    
    
    (1,371
    )Total Federal income taxes
    
    $
    2,561,110
    
    
    
    2,960,871
    
    
    
    2,418,884
  (6)
    
    Retirement Plans, Other Postretirement Benefit Plans and Deferred
Compensation Plans  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s funding policy is to make
annual contributions sufficient to fund the plans normal cost (current
service cost) plus amortization of the unfunded prior service cost. The
Company and its affiliates are charged the allocable share of such
contributions 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 on a current
basis and the plan is not funded. 43




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  The following table summarizes plan assets, obligations, and pension cost
of the pension plan and other postretirement benefit plan as of December
31, 2003 and 2002: Pension Benefits
    
    Other Benefits2003
    
    2002
    
    2003
    
    2002Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    2,264,789
    
    
    
    2,169,044
    
    
    $
    126,754
    
    
    
    144,591Benefits accrued/service cost
    
    
    68,513
    
    
    
    93,977
    
    
    
    
    
    
    
    Interest
    
    
    151,362
    
    
    
    147,301
    
    
    
    8,161
    
    
    
    10,483Actuarial gain or loss
    
    
    206,714
    
    
    
    (85,080
    )
    
    
    (16,355
    )
    
    
    (7,908
    )Benefits paid
    
    
    (303,866
    )
    
    
    (60,453
    )
    
    
    (11,417
    )
    
    
    (20,412
    )Benefit obligation at end of year
    
    $
    2,387,512
    
    
    
    2,264,789
    
    
    $
    107,143
    
    
    
    126,754Change in plan assets:Fair value of plan assets at beginning
of year
    
    $
    1,492,616
    
    
    
    1,425,129
    
    
    $
    
    
    
    
    Actual return on plan assets
    
    
    333,110
    
    
    
    127,940
    
    
    
    
    
    
    
    Employer contributions
    
    
    30,862
    
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    (303,866
    )
    
    
    (60,453
    )
    
    
    
    
    
    
    Fair value of plan assets at end of year
    
    $
    1,552,722
    
    
    
    1,492,616
    
    
    $
    
    
    
    
    Funded Status:Funded status
    
    $
    (834,790
    )
    
    
    (772,173
    )
    
    $
    (107,143
    )
    
    
    (126,754
    )Unamortized prior service cost
    
    
    36,654
    
    
    
    40,615
    
    
    
    
    
    
    
    Unrecognized net gain or loss
    
    
    125,792
    
    
    
    127,887
    
    
    
    (101,697
    )
    
    
    (92,466
    )Accrued liabilities
    
    $
    (672,344
    )
    
    
    (603,671
    )
    
    $
    (208,840
    )
    
    
    (219,220
    )Benefit obligation for non-vested employees
    
    $
    42,234
    
    
    
    25,020
    
    
    $
    
    
    
    
    
  The accumulated benefit obligation of the pension plan was $2,055,103 and
$1,938,297 at December 31, 2003 and 2002, respectively. Pension Benefits
    
    Other Benefits2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Components of net periodic benefit cost:Service cost
    
    $
    68,513
    
    
    
    93,977
    
    
    
    93,563
    
    
    $
    
    
    
    
    
    
    
    
    3,010Interest cost
    
    
    151,362
    
    
    
    147,301
    
    
    
    135,507
    
    
    
    8,161
    
    
    
    10,483
    
    
    
    11,383Expected return on plan assets
    
    
    (124,301
    )
    
    
    (127,065
    )
    
    
    (130,659
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized
transition asset
    
    
    
    
    
    
    (2,000
    )
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    Amount of unrecognized gains and losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,124
    )
    
    
    (6,483
    )
    
    
    (14,393
    )Amount of prior service cost recognized
    
    
    3,961
    
    
    
    3,961
    
    
    
    2,936
    
    
    
    
    
    
    
    
    
    
    
    Total net periodic benefit cost
    
    $
    99,535
    
    
    
    116,174
    
    
    
    93,347
    
    
    $
    1,037
    
    
    
    4,000
    
    
    
    
 44




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  The following table summarizes weighted average assumptions used to
determine benefit obligations and net periodic benefit cost for years ended
December 31: Pension Benefits
    
    Other Benefits2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Discount rate at December 31
used to determine benefit
obligations
    
    
    6.25
    %
    
    
    7.00
    %
    
    
    7.25
    %
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.25
    %Discount rate at January 1
used to determine net
periodic benefit cost
    
    
    7.00
    
    
    
    7.25
    
    
    
    7.50
    
    
    
    6.75
    
    
    
    7.25
    
    
    
    7.50Rate of compensation increase
    
    
    3.00
    
    
    
    5.00
    
    
    
    5.00
    
    
    
    
    
    
    
    
    
    
    
    Expected long-term rate of
return on plan assets
    
    
    8.50
    
    
    
    9.00
    
    
    
    9.00
    
    
    
    
    
    
    
    
    
    
    
    
  The Company selects the expected long-term rate-of-return assumption in
consultation with the plans investment advisors and the plans consulting
employee benefit actuary. The rate is intended to reflect the average rate
of earnings to be earned on the plans invested assets sufficient to
provide expected plan benefits. The return assumptions are based on the
long-term behavior of financial indices over full market cycles. Undue
weight is not given to recent experience with higher significance placed on
current forecasts of future long-term economic conditions. Consideration
is given to the potential impact of current and future investment policy,
cash flows into and out of the plan, and expenses (both investment and
non-investment) typically paid out of plan assets to the extent such
expenses are not explicitly estimated within periodic costs.  Assumed health care trend rates at December 31 are as follows: 2003
    
    2002Health care cost trend rate assumed for next year
    
    
    6.25
    %
    
    
    5.25
    %Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
    
    
    5.75
    %
    
    
    5.25
    %Year that the trend rate reaches the ultimate trend rate
    
    
    2004
    
    
    
    2003
  Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one percent annual increase
in assumed health care cost would increase the accumulated postretirement
benefit obligation at December 31, 2003 by approximately $7,000 and the
service and interest cost components of the net periodic postretirement
benefit cost for 2003 by $500. A one percent annual decrease in the
assumed health care costs would decrease the accumulated postretirement
benefit obligation at December 31, 2003 by approximately $6,500 and the
service and interest components of the net periodic postretirement benefit
cost by $400.  On December 8, 2003 the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) was enacted. In accordance with
Financial Staff Position No. FAS 106-1, any measure of the accumulated
postretirement benefit obligation or net periodic postretirement benefit
cost in the Companys financial statements or accompanying notes do not
reflect the effects of the Act on the other postretirement benefit plan.  Specific authoritative guidance on the accounting for the federal subsidy
created by the Act is pending and that guidance, when issued, could require
the Company to change previously reported information. 45




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  There may also be additional requirements of the Act, such as amending the
Companys plan, in order for the Company to benefit from the new
legislation.  Plan Assets  The investment objective of the Companys pension plan is to achieve a 3.5%
premium over the rate of inflation on a total return basis. The rate of
inflation is defined as the Consumer Price Index and the time horizon is
five years on a rolling basis. The Companys risk management practices
include monitoring of the plans actuarial assumptions for investment
return and adjusting the investment objectives accordingly.  The Companys pension plan weighted-average asset allocations at December
31, 2003 and 2002, by asset category are as follows: Plan Assets atDecember 31Asset Category
    
    2003
    
    2002Equity securities
    
    
    50
    %
    
    
    52
    %Debt securities
    
    
    40
    
    
    
    39Real estate
    
    
    5
    
    
    
    5Other
    
    
    5
    
    
    
    4Total
    
    
    100
    %
    
    
    100
    %
  The Company has examined various asset allocation structures, through
consultation with the plans external investment advisors, and has
determined the following target allocations to be best suited to meet the
long-term objectives of the plan: Normal
    
    Minimum
    
    MaximumLarge cap equity
    
    
    35
    %
    
    
    5
    %
    
    
    50
    %Fixed maturity
    
    
    45
    %
    
    
    10
    %
    
    
    55
    %Cash equivalents
    
    
    5
    %
    
    
    5
    %
    
    
    10
    %International equity
    
    
    5
    %
    
    
    
    
    
    
    10
    %Real estate
    
    
    5
    %
    
    
    
    
    
    
    10
    %Small cap equity
    
    
    5
    %
    
    
    
    
    
    
    10
    %
  Permitted and Prohibited Investments of the Plan  Equity holdings: Securities which are broadly classified as investment
grade issues, regardless of whether or not they are listed on a recognized
stock exchange, are eligible for inclusion in the plans portfolio. The
market value of any one company holding shall not exceed 10% of the total
market value of equities held in the portfolio. Convertible securities are
permitted if their credit quality rating from a recognized rating service
is not lower than BB.  Fixed maturity holdings: Marketable issues are desired so the portfolio can
be actively managed. Fixed maturity holdings should be reasonably
diversified to the extent that it is prudent to do so without requiring the
plans investment manager to purchase odd lots. The fixed maturity
holdings
should be comprised of high quality issues that have a credit rating of no
less than investment grade 46




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  from any of the nationally recognized rating
services. No one companys aggregate debt and equity holdings in the plan
shall exceed 10% of the total plans market value.  Cash equivalents: The following short-term investment vehicles are
acceptable: U.S. Government issues, commercial paper rated A-1 by Standard
& Poors and P-1 by Moodys, certificates of deposit of bank and savings
and loan institutions with listed deposits in excess of $500 million,
repurchase agreements with banks provided the agreement is fully
collateralized, no-load mutual funds, Euro-dollar certificates of deposit,
and Banker Acceptance notes.  Prohibited investments: The following categories of securities are not
permitted by the plan: short sales, margin purchases or lending or
borrowing money, letter stock, private placements or direct placements,
commodities, securities of the plans asset manager, custodian, their
parent, or subsidiaries as well as the securities of the Company or its
subsidiaries.  Cash Flows  The Company expects to contribute $126,000 to its pension plan and $8,400
to its other postretirement benefits plan in 2004.  The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid: Pension
    
    OtherBenefits
    
    Benefits2004
    
    $
    90,400
    
    
    $
    8,4002005
    
    
    112,000
    
    
    
    8,7002006
    
    
    115,700
    
    
    
    9,0002007
    
    
    123,900
    
    
    
    9,3002008
    
    
    125,900
    
    
    
    9,500Years 2009 - 2013
    
    
    753,100
    
    
    
    48,800
  The Company also sponsors a defined contribution plan for the benefit of
the Companys employees and the employees of affiliated companies.
Matching contributions by the Company vary and are determined by the
Companys prior year profitability measured by return on equity. The
Companys matching contributions were $14,706 in 2003, $26,664 in 2002 and
$38,000 in 2001.  (7)
    
    Transactions with Affiliates  Mutual, through its wholly-owned subsidiary, Shield, controls approximately
33% of the Companys outstanding common stock. In addition, most of the
officers and directors of the Company hold similar positions with these
affiliates.  Certain general expenses are allocated to the Company from its affiliates.
These expenses, such as salaries, advertising, rents, etc., represent the
Companys share of expenses initially paid by Mutual and are allocated
based on specific identification or, if undeterminable, generally on the
basis of each companys premium. Expenses allocated to the Company may not
be the same as expenses incurred if the Company operated as a stand-alone
entity. Expenditures allocated to the Company amounted to
$3,704,114 in 2003, $3,471,048 in 2002 and $3,992,556 in 2001. At December
31, 2003 the Company owed $576,644 to Mutual and at December 31, 2002 the
Company was owed $42,469 from Mutual. 47




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  The Company expensed pension costs of $99,535 in 2003, $116,174 in 2002,
and $93,347 in 2001.  Rent for use of software of $106,000 in 2003, 2002, and 2001, has been
charged to the affiliated companies.  (8)
    
    Stock-Based Compensation  The Company has various stock option plans for the Companys officers and
key employees, as well as directors.  The Company accounts for its various stock-based compensation as expense,
recorded on the grant date only to the extent that the current market price
of the underlying stock exceeds the exercise price on the grant date.  Under the employee plan, options may be granted to purchase up to 937,500
 shares of the Companys common stock at a per share price of not less than
100% of fair market value at date of grant. Under the directors plan,
options are granted based on the level of directors fees at a per share
price of 50% of fair market value at date of grant. The employee and
directors options have a term of 10 years and are not subject to any
vesting requirements. The weighted-average remaining contractual life on
options outstanding at December 31, 2003 is 7.0 years. The
weighted-average grant date fair value of options granted during 2003,
2002, and 2001 was $9.28, $9.61, and $7.69, respectively. Stock option
transactions are summarized below: Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    Exercise2003
    
    Price
    
    2002
    
    Price
    
    2001
    
    PriceOptions outstanding
at January 1
    
    
    104,532
    
    
    $
    4.69
    
    
    
    87,134
    
    
    $
    4.67
    
    
    
    70,532
    
    
    $
    4.41Granted
    
    
    17,290
    
    
    
    4.70
    
    
    
    17,398
    
    
    
    4.80
    
    
    
    16,602
    
    
    
    5.75Options outstanding
at December 31
    
    
    121,822
    
    
    $
    4.70
    
    
    
    104,532
    
    
    $
    4.69
    
    
    
    87,134
    
    
    $
    4.67Options exercisable
at December 31
    
    
    121,822
    
    
    
    
    
    
    
    104,532
    
    
    
    
    
    
    
    87,134Options available
for grant at
December 31
    
    
    495,357
    
    
    
    
    
    
    
    512,647
    
    
    
    
    
    
    
    530,045
 48




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  The following table summarizes information about stock options outstanding
at December 31, 2003: Options Outstanding and Exercisable WeightedAverage
    
    WeightedRemaining
    
    AverageRange of
    
    Number
    
    Contractual
    
    ExerciseExercise Price
    
    Outstanding
    
    Life in Years
    
    Price$
    0  2.40
    
    
    
    21,314
    
    
    
    2.8
    
    
    $
    2.313.80  4.80
    
    
    
    66,221
    
    
    
    7.7
    
    
    
    4.455.75  7.63
    
    
    
    34,287
    
    
    
    6.7
    
    
    
    6.67$
    0  7.63
    
    
    
    121,822
    
    
    
    7.0
    
    
    $
    4.70
  In addition to the stock options described above, the Company has awarded
nontransferable, restricted shares of Company common stock to various key
executives under key executive restricted stock bonus plans. The market
value of the common stock at the date of issuance is recorded as
compensation expense using the straight-line method over the vesting period
of the awards. The Company awarded 57,984, 67,329, and 47,439 shares of
restricted stock under such plans during 2003, 2002, and 2001,
respectively. The weighted-average grant date fair value of such shares
was $9.81, $9.09, and $9.83 respectively. Aggregate compensation expense
with respect to the foregoing restricted stock awards was $472,764,
$51,553, and $424,726 in 2003, 2002, and 2001 respectively.  In accordance with APB Opinion No. 25, $552,000, $135,000, and $519,000 in
compensation expense has been recorded in 2003, 2002, and 2001,
respectively, for the various stock option and restricted stock awards
granted in 2003, 2002, and 2001. 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: Years ended December 31,2003
    
    2002
    
    2001Net income:As reported
    
    $
    5,282,301
    
    
    
    7,308,874
    
    
    
    6,445,672Pro forma
    
    
    5,227,258
    
    
    
    7,247,329
    
    
    
    6,420,950Basic net income per share:As reported
    
    
    .84
    
    
    
    1.15
    
    
    
    1.02Pro forma
    
    
    .83
    
    
    
    1.14
    
    
    
    1.01Diluted net income per share:As reported
    
    
    .80
    
    
    
    1.13
    
    
    
    .99Pro forma
    
    
    .79
    
    
    
    1.12
    
    
    
    .98
  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 five years for
options and seven years for restricted stock awarded in 2001, and three
years for restricted stock awarded in 2003 and 2002; expected dividend
yield of 1.78% for 2003 grants, 1.67% for 2002 49




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  grants, 1.60% for 2001 grants; risk-free interest rate of 4.0% for 2003,
3.5% for 2002, and 4.5% for 2001; and an expected volatility of 80% for
2003 grants, 66% for 2002 grants, 65% for 2001 grants.  (9)
    
    Statutory Financial Statements  Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP.
Material differences resulting from these accounting practices include:
deferred policy acquisition costs which are not recognized for statutory
purposes; statutory non-admitted assets are recognized under GAAP
accounting; statutory investment valuation reserves are not recognized
under GAAP accounting; premiums for universal life and investment-type
products are recognized as revenues for statutory purposes and as deposits
to policyholders accounts under GAAP; different assumptions are used in
calculating future policyholders benefits; and different methods are used
for calculating valuation allowances and deferred federal income taxes for
statutory and GAAP purposes.  Net income and shareholders equity, as reported to regulatory authorities
in conformity with statutory accounting practices for each of the years in
the three-year period ended December 31, 2003 are as follows: 2003
    
    2002
    
    2001Statutory net (loss) income
    
    $
    (495,425
    )
    
    
    (256,802
    )
    
    
    2,258,801Statutory shareholders equity
    
    $
    33,538,647
    
    
    
    34,859,061
    
    
    
    34,431,844
  The Georgia Insurance Code limits dividends in any one year to the greater
of statutory earnings, excluding realized capital gains, or 10% of
statutory surplus, unless the express permission of the Georgia Insurance
Department is obtained. Dividend payments to shareholders are further
limited by the Georgia Insurance Code to unassigned statutory surplus,
which at December 31, 2003 was approximately $27,000,000. The excess of
retained earnings determined in accordance with GAAP over unassigned
statutory surplus is not available for payment of dividends. The Company
may pay a dividend amounting to approximately $2,700,000 in 2004 without
prior regulatory approval.  (10)
    
    Litigation  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 will
result in any material loss to the Company.  (11)
    
    Business Segments  The Companys operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue life
insurance, and (iii) brokerage operations. These segments are
differentiated primarily by their respective methods of distribution and
the nature of related products, as 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 issue and simplified issue products
are distributed through independent agents as well as exclusive agents, and
brokerage operations involve third party products distributed through the
Companys exclusive and independent agents. The Company does not group
items on the consolidated balance sheet into segments, nor does it analyze
those items by segment 50




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  when making management decisions. The Company allocates net investment
income and net realized gains to its individual life insurance and
guaranteed issue and simplified issue life insurance segments based on the
ratio of each segments reserves to total reserves. Net investment income
and net realized gains for the Companys brokerage segment is based on
actual amounts earned by its brokerage subsidiaries. 2003
    
    2002
    
    2001Individual life insurance:Premiums
    
    $
    19,979,437
    
    
    
    19,347,710
    
    
    
    18,658,255Net investment income
    
    
    7,905,844
    
    
    
    8,857,310
    
    
    
    9,458,445Net realized investment gains
    
    
    1,624,312
    
    
    
    935,571
    
    
    
    24,969Total revenue
    
    
    29,509,593
    
    
    
    29,140,591
    
    
    
    28,141,669Policyholder benefits and claims
    
    
    10,606,712
    
    
    
    9,478,267
    
    
    
    8,821,942Interest credited
    
    
    5,912,341
    
    
    
    5,904,423
    
    
    
    5,527,001Amortization of deferred policy acquisition costs
    
    
    2,829,148
    
    
    
    2,084,635
    
    
    
    3,248,281Other operating expenses
    
    
    6,350,370
    
    
    
    5,143,895
    
    
    
    5,257,470Total benefits and expenses
    
    
    25,698,571
    
    
    
    22,611,220
    
    
    
    22,854,694Segment profit before income taxes
    
    
    3,811,022
    
    
    
    6,529,371
    
    
    
    5,286,975Guaranteed issue and simplified issue life insurance:Premiums
    
    
    14,358,260
    
    
    
    12,438,241
    
    
    
    10,529,996Net investment income
    
    
    1,036,838
    
    
    
    952,774
    
    
    
    775,780Net realized investment gains
    
    
    213,531
    
    
    
    101,134
    
    
    
    2,532Total revenue
    
    
    15,608,629
    
    
    
    13,492,149
    
    
    
    11,308,308Policyholder benefits and claims
    
    
    11,311,624
    
    
    
    9,332,175
    
    
    
    7,656,444Amortization of deferred policy acquisition costs
    
    
    2,262,856
    
    
    
    1,676,350
    
    
    
    1,218,431Other operating expenses
    
    
    1,854,716
    
    
    
    2,001,826
    
    
    
    1,913,723Total benefits and expenses
    
    
    15,429,196
    
    
    
    13,010,351
    
    
    
    10,788,598Segment profit before income taxes
    
    
    179,433
    
    
    
    481,798
    
    
    
    519,710Brokerage:Brokerage commissions
    
    
    4,906,455
    
    
    
    4,242,470
    
    
    
    4,190,482Net investment income
    
    
    8,047
    
    
    
    18,880
    
    
    
    48,397Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    
    4,914,502
    
    
    
    4,261,350
    
    
    
    4,238,879Operating expenses
    
    
    1,003,102
    
    
    
    966,955
    
    
    
    1,106,448Segment profit before income taxes
    
    
    3,911,400
    
    
    
    3,294,395
    
    
    
    3,132,431Combined segment profit before income taxes
    
    
    7,901,855
    
    
    
    10,305,564
    
    
    
    8,939,116Group life insurance and individual
accident and health results
    
    
    (58,444
    )
    
    
    (35,819
    )
    
    
    (74,560
    )Income before federal income taxes
    
    $
    7,843,411
    
    
    
    10,269,745
    
    
    
    8,864,556
 51




---



##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003  (12)
    
    Quarterly Results (Unaudited)  The following is a summary of the unaudited quarterly results of operations
for the three years ended December 31, 2003. 2003 quarter ended
    
    March 31
    
    June 30
    
    September 30
    
    December 31Premiums
    
    $
    8,198,949
    
    
    
    8,824,057
    
    
    
    8,776,978
    
    
    
    10,082,122Net investment income, realized
investment gains and brokerage income
    
    
    3,790,953
    
    
    
    4,099,239
    
    
    
    3,688,874
    
    
    
    4,115,962Total revenue
    
    
    11,989,902
    
    
    
    12,923,296
    
    
    
    12,465,852
    
    
    
    14,198,084Benefits and expenses
    
    
    9,721,412
    
    
    
    10,621,985
    
    
    
    9,798,364
    
    
    
    13,591,962Net income
    
    
    1,561,736
    
    
    
    1,570,852
    
    
    
    1,884,874
    
    
    
    264,839Basic income per share of common stock
    
    $
    .25
    
    
    
    .25
    
    
    
    .30
    
    
    
    .04Diluted income per share of common stock
    
    
    .24
    
    
    
    .23
    
    
    
    .29
    
    
    
    .04
 2002 quarter ended
    
    March 31
    
    June 30
    
    September 30
    
    December 31Premiums
    
    $
    7,666,317
    
    
    
    8,007,993
    
    
    
    8,060,634
    
    
    
    9,357,148Net investment income, realized
investment gains and brokerage income
    
    
    3,637,194
    
    
    
    3,503,033
    
    
    
    4,232,362
    
    
    
    3,735,549Total revenue
    
    
    11,303,511
    
    
    
    11,511,026
    
    
    
    12,292,996
    
    
    
    13,092,697Benefits and expenses
    
    
    9,074,595
    
    
    
    9,226,686
    
    
    
    9,456,105
    
    
    
    10,173,099Net income
    
    
    1,531,168
    
    
    
    1,693,718
    
    
    
    2,022,074
    
    
    
    2,061,914Basic income per share of common stock
    
    $
    .24
    
    
    
    .27
    
    
    
    .32
    
    
    
    .33Diluted income per share of common stock
    
    
    .24
    
    
    
    .26
    
    
    
    .31
    
    
    
    .32
 2001 quarter ended
    
    March 31
    
    June 30
    
    September 30
    
    December 31Premiums
    
    $
    7,031,353
    
    
    
    7,142,797
    
    
    
    7,562,016
    
    
    
    8,484,571Net investment income, realized
investment gains and brokerage income
    
    
    3,460,539
    
    
    
    3,743,105
    
    
    
    3,751,475
    
    
    
    3,545,487Total revenue
    
    
    10,491,892
    
    
    
    10,885,902
    
    
    
    11,313,491
    
    
    
    12,030,058Benefits and expenses
    
    
    8,894,448
    
    
    
    8,595,265
    
    
    
    8,750,623
    
    
    
    9,616,451Net income
    
    
    1,021,054
    
    
    
    1,701,120
    
    
    
    1,966,038
    
    
    
    1,757,460Basic income per share of common stock
    
    $
    .16
    
    
    
    .27
    
    
    
    .31
    
    
    
    .28Diluted income per share of common stock
    
    
    .16
    
    
    
    .26
    
    
    
    .30
    
    
    
    .27
  Note - Failure of individual quarterly income per share to total to annual
income per share results from the computation of weighted average number of
 shares on an individual quarterly basis.  The fourth quarter results for the three years include participation in
federally sponsored group pools as follows: 2003
    
    2002
    
    2001Premiums
    
    $
    1,451,886
    
    
    
    1,201,459
    
    
    
    923,435Benefits
    
    
    1,425,430
    
    
    
    1,180,846
    
    
    
    903,187
 52




---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of
Cotton States Life Insurance Company: We have audited the accompanying consolidated balance sheet of Cotton States
Life Insurance Company and subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of earnings, shareholders equity, cash
flows, and comprehensive income for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Cotton States Life Company and subsidiaries at December 31, 2003
and 2002, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States. /s/ Ernst & Young LLP Atlanta, Georgia
February 13, 2004 53




---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders
Cotton States Life Insurance Company: We have audited the accompanying consolidated statements of earnings,
shareholders equity, cash flows, and comprehensive income of Cotton States
Life Insurance Company and subsidiaries (the Company) for the year ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Cotton States Life Insurance Company and subsidiaries for the year ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. /s/ KPMG LLP
Atlanta, Georgia
March 14, 2003 54




---



##### Table of Contents



Managements Report to Shareholders of Cotton States Life Insurance Company and
Subsidiaries The accompanying consolidated financial statements for Cotton States Life
Insurance Company and subsidiaries (the Company) were prepared by management,
which is responsible for the objectivity and integrity of these statements.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and,
where appropriate, are based on managements best estimates and judgments.
Other financial data about the Company contained in this annual report is
consistent with that presented in the consolidated financial statements. The Companys consolidated financial statements for the years ended December
31, 2003 and 2002 have been audited by independent auditors, Ernst & Young LLP.
The Companys consolidated financial statements for the year ended December
31, 2001 have been audited by independent auditors, KPMG LLP. Their roles are
to audit the consolidated financial statements in accordance with auditing
standards generally accepted in the United States of America and render an
independent and professional opinion on managements consolidated financial
statements. The auditors reports on the Companys consolidated financial
statements appear on the previous two pages. The Board of Directors, through its audit committee comprised of outside
directors, monitors managements financial reporting. The independent auditors
have direct access to the audit committee and meet with the committee
periodically to discuss the scope of each audit, the results of the audit and
other matters which they believe should be brought to the committees
attention. /s/ J. Ridley Howard
    
    /s/ William J. BarlowJ. Ridley Howard
    
    William J. Barlow, CPAChairman of the Board,
    
    Vice President of FinancePresident and Chief
    
    and Assistant TreasurerExecutive Officer
 55




---



##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE The Company filed a report on Form 8-K on August 22, 2002 relating to the
change in its certifying accountant to Ernst & Young LLP for the year ending
December 31, 2002. 
 ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this annual report, the Company, under the supervision and
with the participation of the Companys management, including the Chief
Executive Officer and the Vice President of Finance and Assistant Treasurer,
has evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Vice President of Finance and Assistant Treasurer concluded that the
Companys disclosure controls and procedures are effective in alerting them in
a timely manner to material information required to be included in the
Companys periodic Securities and Exchange Commission filings. (b) Changes in Internal Controls. There has been no significant change in the
Companys internal control over financial reporting that occurred during the
fourth quarter of 2003 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Identification of Directors The By-laws of the Company provide that the Board of Directors shall be divided
into three classes with approximately one-third of the Board of Directors
elected each year. Each director is elected to hold office for a term of
three years or until his or her successor has been duly elected and has
qualified or until he or she attains the age of 72. Terms Expiring 2004 Annual Meeting J. RIDLEY HOWARD
Director Since 1989
Age 56 Since 1998, Mr. Howard has been the Chairman of the Board of Directors of the
Company, Mutual, CSI, CSMR and Shield. He has served as President and Chief
Executive Officer of the Company, Mutual, CSI, CSMR, and Shield since 1989.
Mr. Howard held various other offices with the Company and its affiliates prior
to January 1, 1989. Mr. Howard is a member of the Executive Committee of the
Board of Directors of the Company. Mr. Howard is a member of the Board of
Directors of Piedmont Bank of Georgia. CAROL D. CHERRY
Director Since 1996
Age 56 Since 1976, Ms. Cherry has been Chairman of the Board of Directors of Shopn
Chek, Inc., an international marketing service company providing clients with
information relative to the verbal and physical
presentation of their products and/or services at the retail level. From 1976
to 1998, Ms. Cherry was also the 56




---



##### Table of Contents



President of Shopn Chek, Inc. Ms. Cherry
also is a member of the Compensation Committee and the Investment Committee of
the Board of Directors of the Company. Ms. Cherry also is a member of the
Board of Directors of Mutual, CSI, and Cherry Convention Services, Inc. DARRELL D. PITTARD
Director Since 2001
Age 55 Since November 2000, Mr. Pittard has been the Managing Partner, Chairman and
Chief Executive Officer of Currahee Bridge Development, LLC, a mixed-use resort
development on Lake Hartwell, Georgia. Mr. Pittard is also Vice Chairman of
Branch Banking and Trust of Georgia. From January 2000 through November 2000,
Mr. Pittard served as Executive Vice President, Branch Banking and Trust of
Georgia. From 1993 through January 2000, Mr. Pittard was Chairman and Chief
Executive Officer of Premier Bancshares. Mr. Pittard is also a member of the
Compensation Committee and Investment Committee of the Board of Directors of
the Company. Mr. Pittard is also a member of the Board of Directors of Mutual,
Branch Banking and Trust of Georgia, and Branch Banking and Trust of North
Carolina. Terms Expiring 2005 Annual Meeting MATHEWS D. SWIFT
Director Since 1997
Age 56 Since 1998, Mr. Swift has been the President and Chief Operating Officer of W.
C. Bradley Co., Real Estate Division and President of Developers-Investors,
Inc., a subsidiary of W. C. Bradley Co. From 1986 to 1997, Mr. Swift was the
Vice President and General Manager of W. C. Bradley Co., Real Estate Division.
Mr. Swift serves as a member of the Audit Committee and the Investment
Committee of the Board of Directors of the Company. Mr. Swift also is a member
of the Board of Directors of Mutual, CSMR, Swift-Illges Foundation, Northstar
Industries, Inc., and he serves as a director of the Advisory Board of Columbus
Bank & Trust Company, an affiliate of Synovus Financial Corporation. GAYLORD O. COAN
Director Since 1995
Age 68 From 1995 until his retirement in July 2001, Mr. Coan served as Chief Executive
Officer of Gold Kist, Inc. Mr. Coan is Chairman of the Executive Committee and
is a member of the Audit Committee and the Compensation Committee of the Board
of Directors of the Company. Mr. Coan also is a member the Board of Directors
of Mutual and Imperial Sugar Company. E. JENNER WOOD, III
Director Since 1991
Age 52 Since June 2002, Mr. Wood has been President of SunTrust, Central Group.
Prior to his current position, Mr. Wood was President of SunTrust Bank, Georgia
from June 2001 through May 2002. Mr. Wood also served as Executive Vice
President, Trust and Investment Services, of SunTrust Banks, Inc., a position
he held from October 1993 through May 2001. Mr. Wood is Chairman of the Audit
committee and is a member of the Executive Committee of the Board of Directors
of the Company. Mr. Wood also is a
member of the Board of Directors of Mutual, CSI, Oxford Industries, Crawford &
Company and Georgia 57




---



##### Table of Contents



Power Company. Terms Expiring 2006 Annual Meeting ROBERT C. McMAHAN
Director Since 1987
Age 63 Since 1994, Mr. McMahan has been President and Chief Executive Officer of
Golden Point Group, Inc., a Georgia corporation. Mr. McMahan was President and
CEO of Fernbank, Inc., d/b/a Fernbank Museum of Natural History through
November, 1994. Mr. McMahan was Vice Chairman of First Union National Bank of
Georgia through September 1993. Mr. McMahan was Chairman, Chief Executive
Officer and a director of DF Southeastern Inc., prior to January 15, 1993, and
of Decatur Federal Savings & Loan Association prior to March 1, 1993, and was
President of each entity prior to April 1989. Mr. McMahan is Chairman of the
Compensation Committee and serves as a member of the Executive Committee of the
Board of Directors of the Company. Mr. McMahan also is a member of the Board
of Directors of Mutual, CSMR, First Union National Bank of Georgia, Golden
Point Group, Inc., Integration Solutions Group, LLC, Piedmont Community Bank,
United Commercial Bank, and Mountain Heritage Bank, in organization. THOMAS A. HARRIS
Director Since 1995
Age 55 Since 1987, Mr. Harris has been the President and Chief Executive Officer of
Merchant Capital Investments, Inc., a Montgomery, Alabama investment and
merchant banking firm. Mr. Harris is Chairman of the Investment Committee and
a member of the Executive Committee and the Audit Committee of the Board of
Directors of the Company. Mr. Harris also serves on the Board of Directors of
Mutual, Corral Southeast, and The Capital Partnership. There are no family relationships among the directors or between any director
and any executive officer of the Company. All directors have served
continuously since their first election or appointment. OTHER INFORMATION ABOUT THE BOARD AND ITS COMMITTEES During 2003, the Board of Directors held nine meetings. Each director attended
at least 75% of the aggregate meetings of the Board of Directors and meetings
of committees of which he or she was a member. The Board of Directors has four
standing committees. Certain information regarding the function of the Boards
committees, and the number of meetings held by each committee during 2003, is
presented below. Audit Committee The Audit Committee annually reviews and appoints the certified public
accounting firm to be engaged as independent auditors of the Company for the
next calendar year. Management is responsible for the Companys internal
controls, financial reporting process and compliance with the laws and
regulations and ethical business standards. The independent accountants are
responsible for performing an independent audit of the Companys consolidated
financial statements in accordance with generally accepted auditing standards
and to issue a report thereon. The Audit Committees responsibility is to
monitor and oversee these processes. Each member of the Audit Committee is
independent, as such term is defined under applicable NASD rules. During 2003,
the Audit Committee held three meetings. The Board of Directors of the Company has determined that the Company does not
have an audit committee financial expert, within the meaning of Item 401(h)
of Regulation S-K, serving on the Audit
Committee. The Company believes that each member of the Audit Committee is
financially literate and 58




---



##### Table of Contents



possesses sufficient experience, both professionally
and by virtue of his or her service as a director and member of the Audit
Committee, to be fully capable of discharging his or her duties as a member of
the Audit Committee. However, none of the members of the Audit Committee has a
professional background in accounting or preparing, auditing, analyzing or
evaluating financial statements. If the Audit Committee determines that it
requires additional financial expertise, it will either engage professional
advisers or seek to recruit a member who would qualify as an audit committee
financial expert within the meaning of Item 401(h) of Regulation S-K. Compensation Committee The Compensation Committee periodically reviews the compensation and other
benefits provided to officers of the Company and advises the Board of Directors
with respect to compensation for the officers of the Company. During 2003, the
Compensation Committee held two meetings. Investment Committee The Investment Committee reviews the Companys investments and advises the
Board of Directors with respect to such investments. During 2003, the
Investment Committee held four meetings. Executive Committee The Executive Committee is authorized to act on behalf of the Board of
Directors on all matters that may arise between regular meetings of the Board
of Directors upon which the Board of Directors would be authorized to act,
including the nomination of directors. During 2003, the Executive Committee
held four meetings. Identification of Executive Officers The executive officers of the Company, their respective ages and all positions
and offices with the Company held by each are as follows: Year ElectedName
    
    Age
    
    as an Officer
    
    Position or OfficeJ. Ridley Howard
    
    
    56
    
    
    
    1984
    
    
    Chairman of the Board, President
and Chief Executive OfficerHarry V. Scott, Jr.
    
    
    56
    
    
    
    1990
    
    
    Senior Vice PresidentWilliam J. Barlow
    
    
    53
    
    
    
    1986
    
    
    Vice President of Finance and Assistant TreasurerWendy M. Chamblee
    
    
    54
    
    
    
    1986
    
    
    Vice President  Human Resources, Corporate
Communications and Corporate SecretaryNorma Y. Christopher
    
    
    54
    
    
    
    1987
    
    
    Vice President  Life ActuaryW. Michael Cook
    
    
    52
    
    
    
    1994
    
    
    Vice President  Marketing
 J. Ridley Howard was elected Chairman of the Board of Directors of the Company,
Mutual, Shield, CSI, and CSMR, effective January 1, 2001. Mr. Howard continues
to hold the offices of President and Chief Executive Officer of the Company,
Mutual, Shield, CSI, and CSMR, which he has held since 1989. Harry V. Scott was elected Senior Vice President of the Company, Mutual, and
Shield, a position he has held since July 7, 2001. Mr. Scott was Vice
President of Marketing for the five years preceding his election as
Senior Vice President of the Company, Mutual, and Shield. 59




---



##### Table of Contents



William J. Barlow was elected Vice President of Finance and Assistant Treasurer
of the Company, Mutual, Shield, CSI, and CSMR, a position he has held since
2002. Mr. Barlow was Vice President  Controller for the five years preceding
his election as Vice President of Finance and Assistant Treasurer. Norma Y. Christopher was elected Vice President  Life Actuary of the Company,
a position she has held since 1987. W. Michael Cook was elected Vice President  Marketing for the Company, Mutual,
and Shield, a position he has held since July 9, 2001. Mr. Cook was Vice
President  Underwriting for Mutual and Shield for the five years preceding his
election as Vice President  Marketing for the Company, Mutual, and Shield. Officers are elected at the meeting of the Board of Directors following the
Annual Meeting of Shareholders to serve for one year or until their successors
are elected. Code of Ethics The Companys Code of Ethics applies to all of the Companys directors,
executive officers and employees. The Code of Ethics is available on the
Companys website at www.cottonstatesinsurance.com under the heading
Investment Information. The Company intends to disclose any amendments to
its Code of Ethics, and any waiver from a provision of its Code of Ethics, on
the Companys website within 5 business days following such amendment or
waiver. 
 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Annual Compensation(1)
    
    Long Term CompensationName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted
    
    All OtherPrincipal Position
    
    Year
    
    Salary
    
    Bonus
    
    Stock Awards(2)
    
    Compensation(3)J. Ridley Howard
    
    
    2003
    
    
    $
    55,240
    
    
    $
    
    
    
    $
    
    
    
    $
    297Chairman, President, and CEO
    
    
    2002
    
    
    
    56,043
    
    
    
    90,965
    
    
    
    270,207
    
    
    
    2762001
    
    
    
    52,602
    
    
    
    95,424
    
    
    
    239,594
    
    
    
    642Harry V. Scott, Jr.
    
    
    2003
    
    
    $
    28,474
    
    
    $
    
    
    
    $
    
    
    
    $
    297Senior Vice President
    
    
    2002
    
    
    
    28,888
    
    
    
    35,420
    
    
    
    92,832
    
    
    
    2762001
    
    
    
    22,814
    
    
    
    27,264
    
    
    
    72,274
    
    
    
    642Norma Y. Christopher
    
    
    2003
    
    
    $
    131,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,581Vice President and Actuary
    
    
    2002
    
    
    
    131,000
    
    
    
    16,905
    
    
    
    45,295
    
    
    
    4,0952001
    
    
    
    132,769
    
    
    
    19,766
    
    
    
    22,718
    
    
    
    4,980
  (1)
    
    The salaries of certain executive officers of the Company are prorated
among the Company, Mutual, and Shield, based upon the relative premium
income of each entity. Ms. Christophers compensation is allocated
entirely to the Company. Total compensation of the Companys named
executive officers for 2003 from all affiliated corporations was $813,581,
of which the Company paid $216,889.  (2)
    
    The aggregate restricted stock holdings at the end of 2003 for Messrs.
Howard and Scott were 60




---



##### Table of Contents



145,682 and 38,974 shares with values of $2,872,849
and $768,567, respectively, based upon the value of the Companys Common
Stock at December 31, 2003. Dividends on stock awards are paid at the
same rate as paid to all share owners.  (3)
    
    This amount equals the Companys 401(k) matching contribution, which is
allocated on the same prorated basis as salaries. Compensation Pursuant to Plans Pension Plan The Company is a participating employer in the Cotton States Employee
Retirement Income Plan (the Pension Plan), which is a qualified pension plan
sponsored jointly with Mutual. The Pension Plan covers all of the Companys
salaried employees. The Pension Plan provides a retirement income benefit at age 65 which is based
on the employees number of years of service (maximum 35 years) and average
earnings during the five consecutive years (in the last ten years of
employment) in which the earnings are highest. Age 65 retirement benefit is
derived as the sum of (i) the product of the number of years of service times
85% of average earnings and (ii) the product of the number of years of service
times 55% of excess average earnings. Excess average earnings is the amount,
if any, by which the average earnings for a participant exceeds the 35 year
average maximum social security taxable wage base for all persons born in the
same year as the participant. The Pension Plan also provides an early
retirement benefit after age 55, with no reduction in benefit entitlement due
to age, when the sum of the employees age and years of credited service equals
or exceeds 80. If the employee has not obtained 80 points at retirement, the
benefits are reduced 5% for each year the retirees age is less than 65. The
Pension Plan also contains a death benefit for the surviving spouse of an
employee (who had at least five years of credited service) which is equal to
50% of the deceased employees accrued benefit. If the death occurs after
termination from employment and prior to an early retirement date, the spouses
benefit is reduced as for early retirement income benefits. Accrued benefits
under the Pension Plan vest after the employee accrues five years of service. Supplemental Executive Retirement Plan The Company adopted the Cotton States Supplemental Executive Retirement Plan
(SERP) effective January 1, 1992 in order to provide for a supplemental
pension plan to replace pension benefits which were affected as a result of
amendments to the Internal Revenue Code of 1986, as amended (IRC). The SERP is an agreement between the Company and employees meeting the
qualification provisions of the SERP in which the Company provides benefits in
excess of the limitations on benefits imposed by the IRC regarding highly
compensated employees. The SERP also replaces the pension accruals set forth
under the Pension Plan as a result of the new benefit formulas mandated by the
IRC which resulted in amendments to the Pension Plan. The SERP incorporates
all of the terms and conditions of the Pension Plan and future amendments to
the Pension Plan. Mr. Howard is not a participant in the SERP plan. 61




---



##### Table of Contents



The following table sets forth the estimated annual benefits payable upon
retirement at age 65 under the plans. PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
INCOME ANNUAL BENEFITS PAYABLE UPON RETIREMENT AT AGE 65 Years of service with theFinal average remuneration from
    
    Company and Mutualthe Company and Mutual for thehighest five years
    
    15
    
    20
    
    25
    
    30
    
    35$125,000
    
    
    27,300
    
    
    
    37,800
    
    
    
    48,300
    
    
    
    58,800
    
    
    
    69,300$150,000
    
    
    32,760
    
    
    
    45,360
    
    
    
    57,960
    
    
    
    70,560
    
    
    
    83,160$175,000
    
    
    38,638
    
    
    
    52,920
    
    
    
    67,620
    
    
    
    82,320
    
    
    
    97,020$200,000
    
    
    44,888
    
    
    
    60,480
    
    
    
    77,280
    
    
    
    94,080
    
    
    
    110,880$225,000
    
    
    51,138
    
    
    
    68,184
    
    
    
    85,230
    
    
    
    102,276
    
    
    
    110,880$250,000
    
    
    57,388
    
    
    
    76,517
    
    
    
    95,647
    
    
    
    114,776
    
    
    
    114,776$300,000
    
    
    69,888
    
    
    
    93,184
    
    
    
    116,480
    
    
    
    139,776
    
    
    
    139,776$350,000
    
    
    82,388
    
    
    
    109,851
    
    
    
    137,313
    
    
    
    164,776
    
    
    
    164,776$400,000
    
    
    94,888
    
    
    
    126,517
    
    
    
    158,147
    
    
    
    189,776
    
    
    
    189,776$450,000
    
    
    107,388
    
    
    
    143,184
    
    
    
    178,980
    
    
    
    214,776
    
    
    
    214,776$500,000
    
    
    119,888
    
    
    
    159,851
    
    
    
    199,813
    
    
    
    239,776
    
    
    
    239,776
 The benefits reflected in the preceding table are in addition to an employees
social security benefits. The Company has allocated its proportionate share of
retirement costs for the officers it shares with Mutual and Shield. The executive officers named in the summary Compensation Table have been
credited with the following years of service: J. Ridley Howard, 22 years;
Harry V. Scott, 15 years; and Norma Y. Christopher, 16 years. The compensation
covered by the plans for Mr. Howard, Mr. Scott, and Ms. Christopher is based on
the same method that salaries are allocated among the Company, Mutual, and
Shield. The estimated annual retirement benefits under the plans for all executive
officers of the Company as a group from the participating companies aggregate
$242,439. This estimate assumes no change from 2003 salaries, retirement at
age 65, and continuous employment with the Company. Estimated annual
retirement benefits under the plans attributable solely to service with the
Company cannot be stated due to the allocation of service and compensation
among the Company and its affiliates. 62




---



##### Table of Contents



Incentive Savings Plan The Company participates in the Cotton States Incentive Savings and Investment
401(k) Plan (the 401(k) Plan). The 401(k) Plan is a qualified savings
incentive plan sponsored by the same companies that sponsor the Companys Plan.
The 401(k) Plan is open to all employees who have completed one year of
service and have reached their twenty-first birthday. Eligible employees may
contribute from 2% to 10% of their compensation to the 401(k) Plan. The
Company makes its matching contribution based only on the first 6% of an
employees compensation, which is not to exceed a maximum contribution of
$12,000 per employee. The match is based on the return on equity of the
sponsoring companies. The Companys contribution will not be less than 20% nor
more than 60% of the employees contribution eligible for matching. Employees
are fully vested in the Companys contribution to the 401(k) plan after five
years of service. Employees are not permitted to withdraw their account before
age 591⁄2 except in the event of death, disability, termination of
employment, or financial hardship. Incentive Stock Options The Company has a qualified incentive stock option plan for its officers and
key employees and those of its subsidiaries, CSI and CSMR (the ISO Plan).
During 2003, no options were granted under the ISO Plan, and at December 31,
2003, there were no options outstanding under the ISO Plan. Directors Discounted Stock Option Plan The Company has a Directors Discounted Stock Option Plan (the DSOP). The
DSOP is designed to assist the Company in attracting, retaining and
compensating highly qualified individuals who are not employees of the Company
for service as members of the Board and to provide them with a proprietary
interest in the common stock of the Company. The Board believes the DSOP will
be beneficial to the Company and its shareholders by encouraging and enabling
non-employee directors to have a personal financial stake in the Company, in
addition to emphasizing their common interest with the shareholders in
increasing the value of the common stock of the Company in the long term. The DSOP provides for automatic yearly grants of options to purchase shares of
common stock of the Company to each director who elects to participate in the
DSOP. Each director who is not an employee of the Company or any of its
subsidiaries or affiliates may participate by filing with the Company an
irrevocable election to receive the grant of a stock option in lieu of part or
all of the fees which the director would have been entitled to receive for the
immediately preceding year for his or her service on the Board. Options will
be granted automatically on the date of the annual meeting of the Board as to
any director who, prior to the date of such annual meeting, has filed with the
Company an irrevocable election to participate in the DSOP. The number of shares of common stock of the Company subject to each option
granted to a director shall be determined by dividing (i) the directors fee
due to a director, by (ii) the fair market value of the common stock of the
Company on the date of grant, minus the option exercise price. The fair market
value of the common stock of the Company under the DSOP shall be the closing
price as reported on the Nasdaq National Market and the option exercise price
for each option granted shall be 50% of the fair market value, to be paid in
cash by the director upon exercise. All options granted under the DSOP will
expire ten years after the date of grant, subject to DSOP provisions relating
to the retirement of the director because of death, disability, or age. That
portion of an option granted under the DSOP which is attributable to any
portion of the directors fees which is not earned due to termination as a
director, shall automatically abate and be canceled. In the event of the death
of the holder of any unexercised option, all of the holders outstanding
options will become immediately exercisable upon the date of death by his or
her legal representative.
No option may be exercised under the DSOP before the 12 month anniversary of
the date of grant. As of December 31, 2003 a total of 281,250 shares of Company common stock is
reserved for issuance under the DSOP (subject to adjustment for subsequent
stock splits, stock dividends and certain other changes 63




---



##### Table of Contents



in the common stock of the Company). Excluding 14,417 options held by retired
directors as of December 31, 2003, options to acquire 107,405 shares were
outstanding under the DSOP, including 17,287 options to be granted
automatically at the 2004 Annual Meeting. Upon the exercise of an option, the
Company will issue authorized but previously unissued shares. The exercise
prices regarding the options outstanding under the DSOP range from $1.92 to
$7.63 per share. If an option issued under the DSOP is terminated or canceled without having
been exercised, the shares which were not purchased thereunder will again
become available for issuance under the DSOP. Adjustments will be made in the number of shares subject to the DSOP and in the
purchase price of outstanding options in the event of any change in the number
of shares of common stock of the Company outstanding as a result of a stock
split or stock dividend, recapitalization, merger, consolidation, or other
similar corporate change. Under the terms of the Agreement and Plan of Merger entered into between the
Company and COUNTRY, each issued and outstanding vested and exercisable stock
option to acquire Company common stock will be cancelled immediately prior to
the effective time of the merger and converted into the right to receive for
each share covered by the stock option the excess, if any, of $20.25 over the
per share exercise price of the stock option, without interest, and net of
applicable withholding taxes. Each issued and outstanding unvested stock
option and unexercised stock option with a per share exercise price of $20.25
or more will be cancelled without payment. Options to purchase Company common
stock issued under the DSOP held by directors of the Company will fully vest
and become non-forfeitable upon the merger. Performance Share Awards Plan The Company has a Performance Share Awards Plan (the PAR Plan). The PAR Plan
is designed to reward employees of the Company, its subsidiaries and affiliates
for services performed on behalf of the Company, to stimulate employees
efforts on behalf of the Company, to encourage such employees to remain with
the Company, and to provide them with an ownership interest in the common stock
of the Company. The Board believes the PAR Plan will be beneficial to the
Company and its shareholders by encouraging and enabling employees to have a
personal financial stake in the Company. The PAR Plan authorizes the Compensation Committee of the Board of Directors to
grant awards of shares of common stock of the Company to employees of the
Company designated by the Compensation Committee. The Compensation Committee
may grant performance share awards in shares of the common stock if the
performance of the Company, or any subsidiary, division or affiliate of the
Company selected by the Compensation Committee, meets certain goals established
by the Compensation Committee during an award period. The Compensation
Committee determines the goals, the maximum payment value of an award, and the
length of an award. In order to receive payment, a recipient of a performance
share award must remain in the employ of the Company until the completion of
the award period. An aggregate of 281,250 shares of common stock of the Company are subject to
the PAR Plan. Adjustments will be made in the number of shares subject to an
award in the event of any change in the number of shares of common stock
outstanding as a result of a stock split or stock dividend, recapitalization,
merger, consolidation, or other similar corporate change. The Company has
granted 337,298 shares under the PAR Plan of which 0 vested in 2003. In the
event of a change of control of the Company, as defined in the PAR Plan, all
awards granted prior to the change of control shall immediately vest and the
shares subject to the award shall be issued to the recipient of the award. The
consummation of the merger between the Company and COUNTRY pursuant to the
terms of the Agreement and Plan of Merger will result in a change of control of
the Company. As a result, each share of Company common stock (whether vested
or unvested) granted under the PAR Plan will be converted into the right to
receive $20.25 per share immediately prior to the effective time of the merger. 64




---



##### Table of Contents



Awards granted under the PAR Plan provide the recipients with the right to
acquire shares of Common Stock as follows: Year
    
    Number of Shares
    
    Date Granted
    
    Earliest Vesting
    
    Latest Vesting2001
    
    
    47,439
    
    
    
    2/21/01
    
    
    
    2/20/04
    
    
    
    2/20/082002
    
    
    52,455
    
    
    
    2/26/02
    
    
    
    2/25/05
    
    
    
    2/25/092003
    
    
    57,984
    
    
    
    3/04/03
    
    
    
    3/03/06
    
    
    
    3/03/10
 As of December 31, 2003, the following named executive officers had been
granted awards to receive shares pursuant to the PAR Plan: Number of Shares Vested
    
    Number of SharesName
    
    Including Dividends
    
    UnvestedJ. Ridley Howard
    
    
    0
    
    
    
    145,682Harry V. Scott
    
    
    0
    
    
    
    38,974Norma Y. Christopher
    
    
    0
    
    
    
    16,870
 Other Compensation Each executive officer is provided the use of one automobile by the Company,
Mutual and Shield, but is required to reimburse the Company, Mutual and Shield
for the personal use of the automobile. Officers are reimbursed for club dues.
The Company, Mutual and Shield are allocated these expenses under the same
formula on which salaries are prorated. The total cost of these expenses does
not exceed 10% of any executive officers salary and bonus compensation. Compensation of Directors During 2003, no director of the Company received any remuneration from the
Company in his or her capacity as a director except for fees, options to
receive common stock in lieu of fees pursuant to the DSOP, and reimbursement
for expenses incurred in connection with attending directors and committee
meetings. No director received cash compensation in excess of $23,300 for his
or her services as a director during 2003. Each director, other than J. Ridley
Howard, is paid an annual stipend of $7,000. Mr. Howard did not receive an
annual stipend in 2003. In addition, each director was paid $850 plus travel
expenses for each meeting of directors and $700 for each committee meeting of
directors attended. Each committee member, other than J. Ridley Howard,
received an additional $1,400 as an annual stipend and each committee
chairperson received $2,000 as an annual stipend. The aggregate directors
fees and reimbursable expenses for 2003 totaled $176,613. There were no
retirement benefits accrued or set aside during 2003 for any director for his
or her services as director. Upon reaching the mandatory retirement age of
72, directors of the Company become directors emeritus and receive stipends
ranging from $600 to $11,000 annually for periods ranging from 15 years to life
after the date of retirement. In February, 2000, the Board of Directors
eliminated the retirement stipends for any director retiring after that date. In addition to the director compensation payable by the Company as disclosed
above, directors who are not employees of the Company are eligible to
participate in the DSOP, which was approved by the shareholders of the Company
at the 1996 annual meeting. The DSOP, which is administered by the
Compensation Committee, permits the grant of stock options to directors of the
Company who are not employees of the Company at an exercise price equal to 50%
of the current market value at the date of grant as an alternative to the
payment of retainer and meeting fees in cash to the directors. Fractional
shares are paid in cash. During 2003, certain directors of the Company
deferred fees in exchange for remuneration in the form of stock options in
lieu of cash to be granted at the 2004 annual meeting. Pursuant to the terms
of a side letter 65




---



##### Table of Contents



agreement to the Agreement and Plan of Merger entered into between the Company
and COUNTRY, however, the directors who deferred fees in exchange for stock
options pursuant to the DSOP will receive a cash payment from the Company in
lieu of stock options for services rendered during 2003. Such cash payment
will be in a per-share amount equal to the difference between (a) the per
share exercise price of the stock options had such stock options been granted
at the 2004 annual meeting and (b) the per-share amount to be paid to holders
of stock options pursuant to the terms of the Agreement and Plan of Merger
(i.e. $20.25). The table below summarizes the amount certain directors will
be entitled to receive from the Company in the form of a cash payment in lieu
of stock options for services rendered during 2003: EXCESS OFOPTION
    
    $20.25 OVER
    
    OPTIONSFEES
    
    PRICE PER
    
    OPTION PRICE
    
    TO BE
    
    TOTAL CASHNAME
    
    DEFERRED
    
    SHARE
    
    PER SHARE
    
    GRANTED
    
    PAYMENTCherry, Carol D.
    
    $
    10,050
    
    
    $
    4.77
    
    
    $
    15.48
    
    
    
    2,105
    
    
    $
    32,585.40Coan, Gaylord O.
    
    $
    22,600
    
    
    $
    4.77
    
    
    $
    15.48
    
    
    
    4,736
    
    
    $
    73,313.28Harris, Thomas A.
    
    $
    11,650
    
    
    $
    4.77
    
    
    $
    15.48
    
    
    
    2,440
    
    
    $
    37,771.20McMahan, Robert C.
    
    $
    19,000
    
    
    $
    4.77
    
    
    $
    15.48
    
    
    
    3,982
    
    
    $
    61,641.36Pittard, Darrell D.
    
    $
    19,200
    
    
    $
    4.77
    
    
    $
    15.48
    
    
    
    4,024
    
    
    $
    62,291.52
 Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee of the Board of Directors during the
fiscal year were Messrs. McMahan and Coan and Ms. Cherry. None of these
directors are or have been officers or employees of the Company or its
subsidiaries. With the exception of Mr. Howard, no executive officer of the
Company serves on the board of any other company other than an affiliate of the
Company. Mr. Howard is a member of the Board of Directors of Piedmont Bank of
Georgia. Employment Agreements The Company has entered into a Management Agreement with Norma Christopher
which entitles her to severance benefits if her employment with the Company is
terminated in certain circumstances. The Management Agreement is for a
one-year term, and automatically renews for successive one-year terms unless
either party to the agreement notifies the other party prior to the end of the
then current term. Ms. Christopher is entitled to severance benefits if,
following a change in control, the Company terminates her employment without
cause or if Ms. Christopher involuntarily terminates her employment. For
purposes of the Management Agreement, an involuntary termination means Ms.
Christophers termination of employment following: change of her
responsibilities, position, authority or duties; reduction in her compensation
or benefits; or a forced relocation. The merger between the Company and
COUNTRY will constitute a change in control under Ms. Christophers
Management Agreement. The severance benefits consist of an amount equal to one
times Ms. Christophers average earnings for the 1998 through 2002 calendar
years. For purposes of the Management Agreement, Ms. Christophers average
earnings are $171,559, which includes salary, bonuses, long term incentive
payments and other direct or imputed compensation. Any severance benefits paid
under the Management Agreement are in lieu of the Companys standard severance
pay policy. 66




---



##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS Security Ownership of Certain Beneficial Owners The table below sets forth certain information about persons or entities known
by the Company to own beneficially more than 5% of the Companys common stock,
as of March 26, 2004. Except as noted below, the Company believes that each of
the persons or entities listed has sole investment and voting power with
respect to the shares included in the table. PercentName and Address
    
    Number of Shares Owned(1)
    
    of ClassShield Insurance Company (2)
244 Perimeter Center Parkway
Atlanta, Georgia 30346
    
    
    2,102,385
    
    
    
    33.2Fidelity Management & Research Company,
    
    
    612,500
    
    
    
    9.7a wholly owned subsidiary of
FMR Corporation82 Devonshire Street
Boston, Massachusetts 02109
  (1)
    
    Under the rules of the U. S. Securities and Exchange Commission, a person
is deemed to be beneficial owner of a security if he or she has or shares
the power to vote or to direct the voting of such security, or the power
to dispose or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities that such a person
has the right to acquire beneficial ownership of within 60 days as well as
any securities owned by such persons spouse, children or relatives living
in the same household. Accordingly, more than one person may be deemed to
be a beneficial owner of the same securities.  (2)
    
    Shield is a wholly owned subsidiary of Mutual. The Board of Directors of
Mutual is identical to the Board of Directors of the Company. Pursuant to
the terms of the Amended and Restated Stockholder Agreement entered into
between the Company, Shield, and COUNTRY in connection with the merger
between the Company and COUNTRY, COUNTRY has shared beneficial ownership
of the shares beneficially owned by Shield. 67




---



##### Table of Contents



Security Ownership of Management The following table sets forth certain information about beneficial ownership
of the Companys common stock of each director and executive officer of the
Company and directors and officers as a group as of March 26, 2004. All shares
are owned outright without shared voting and investment power except as set
forth below. Name of Beneficial Owner:
    
    Amount and Nature ofDirectors
    
    Beneficial Ownership
    
    
    Percent of ClassCarol D. Cherry
    
    
    675
    
    (1
    )
    
    
    *Gaylord O. Coan
    
    
    500
    
    (2
    )
    
    
    *Thomas A. Harris
    
    
    5,187
    
    (3
    )
    
    
    *J. Ridley Howard
    
    
    81,994
    
    (4
    )
    
    
    1.3Robert C. McMahan
    
    
    2,109
    
    (5
    )
    
    
    *Darrell D. Pittard
    
    
    2,000
    
    (6
    )
    
    
    *Mathews D. Swift
    
    
    875
    
    (7
    )
    
    
    *E. Jenner Wood, III
    
    
    1,405
    
    
    
    
    
    *Named Executive OfficersHarry V. Scott
    
    
    6,000
    
    (8
    )
    
    
    *Norma Y. Christopher
    
    
    16,503
    
    (9
    )
    
    
    *All Executive Officers and Directors as a Group(10)(13 persons)
    
    
    125,202
    
    
    
    
    
    2.0
  (*)
    
    Less than 1% not applicable.  (1)
    
    Does not include options to acquire 10,157 shares previously granted
under the DSOP.  (2)
    
    Does not include options to acquire 26,384 shares previously granted
under the DSOP.  (3)
    
    Does not include options to acquire 14,997 shares previously granted
under the DSOP.  (4)
    
    Does not include 145,682 shares plus accrued dividends awarded under the
PAR Plan that have not vested.  (5)
    
    Does not include options to acquire 21,257 shares previously granted
under the DSOP.  (6)
    
    Does not include options to acquire 5,979 shares previously granted under
the DSOP.  (7)
    
    Does not include options to acquire 11,344 shares previously granted under
the DSOP.  (8)
    
    Does not include 38,974 shares plus accrued dividends awarded under the PAR
Plan that have not vested.  (9)
    
    Does not include 16,870 shares plus accrued dividends awarded under the
PAR plan that have not vested.  (10)
    
    Does not include 232,827 shares plus accrued dividends awarded under the
PAR Plan that have not vested which would increase the percentage of
outstanding shares for all officers and directors as a group to 5.7%.
Also does not include options to acquire 90,118 shares previously granted
under the DSOP. 68




---



##### Table of Contents



Changes in Control None. Securities Authorized for Issuance Under Equity Compensation Plans The following table gives information about Common Stock that may be issued
upon the exercise of options, warrants, and rights under all existing equity
compensation plans as of December 31, 2003. Number ofsecurities to be
    
    Weighted-
    
    Number of securities remainingissued upon
    
    average exercise
    
    available for future issuanceexercise of
    
    price of
    
    under equity compensationoutstanding
    
    outstanding
    
    plans (excluding securitiesPlan Category
    
    options
    
    options
    
    reflected in 1st column)Equity compensation
plans approved by
Security holders
    
    
    121,822
    
    
    $
    4.70
    
    
    
    495,357Equity compensation
plans not approved
by security holders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    121,822
    
    
    $
    4.70
    
    
    
    495,357
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management and Others Shield, which is wholly owned by Mutual, owns 2,102,385 shares or 33.2% of the
outstanding common stock of the Company. See Item 12. Certain general expenses are allocated to the Company by Mutual. These
expenses such as salaries, advertising, rents, and related expenses, represent
the Companys share of expenses initially paid by Mutual and are allocated
based on specific identification or, if indeterminable, generally on the basis
of each companys premium income. Expenditures allocated to the Company
amounted to $3,704,114 in 2003. See Item 1. Gaylord O. Coan, a director of the Company, served as President and CEO of Gold
Kist, Inc. through July 2001. Gold Kist, Inc. owns no stock of the Company.
The Company shares offices with Mutual and Shield in a building owned by a
partnership of Mutual and Gold Kist, Inc. The Company is not a partner in the
partnership which owns the building and has no equity interest in the building. Gaylord O. Coan, a director of the Company, served as a director of SunTrust
Bank, Atlanta. E. Jenner Wood, III, a director of the Company, serves as an
executive officer of SunTrust Bank, Central Group. SunTrust Banks, Inc.
received fees from the Company in 2003 for services rendered as the transfer
agent of the Company. SunTrust Bank, Atlanta, a subsidiary of SunTrust Banks,
Inc., received fees from the Company in 2003 for investment and custodial
services and leases of computer hardware. 69




---



##### Table of Contents



ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following is a summary of the fees billed to the Company by Ernst & Young
LLP, the Companys independent auditor, for professional services rendered for
the fiscal years ended December 31, 2003 and December 31, 2002: Audit Fees Fees for Ernst & Young LLP audit services totaled approximately $206,000 in
2003 and approximately $183,000 in 2002, including fees for professional
services rendered for the audit of the Companys annual financial statements
and the review of the Companys quarterly reports on Form 10-Q. Audit-Related Fees The aggregate fees billed by Ernst & Young LLP for professional services
rendered for assistance with the Companys regularly scheduled statutory
examination and assistance with certain filings related to the proposed merger
with COUNTRY for fiscal years 2003 and 2002 were $12,200 and $0, respectively. Tax Fees The aggregate fees billed by Ernst & Young LLP for professional services
rendered for income tax consulting were $0 and $50,750 in 2003 and 2002,
respectively. All Other Fees There were no fees billed by Ernst & Young LLP for professional services
rendered other than as stated under the captions Audit Fees, Audit-Related
Fees, and Tax Fees. All of Ernst & Youngs fees for services, whether for audit or non-audit
services, are pre-approved by the Audit Committee, which concluded that the
provision of such services by Ernst & Young was compatible with the maintenance
of that firms independence in the conduct of its auditing functions. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The following consolidated financial statements and independent auditors
report are included in Part II, Item 8 of this report:  Report of Independent Auditors
Consolidated Balance Sheets, December 31, 2003 and 2002
Consolidated Statements of Earnings, Years ended   December 31,
2003, 2002 and 2001
Consolidated Statements of Shareholders Equity, Years ended   December 31,
2003, 2002 and 2001
Consolidated Statements of Cash Flows, Years ended   December 31,
2003, 2002 and 2001
Consolidated Statements of Comprehensive Income, Years ended   December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements 70




---



##### Table of Contents



(b)
    
    Reports on Form 8-KThe 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, 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 December 29, 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 February 26, 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 March 12, 2004 pursuant to
Item 5 of Form 8-K, Other Events and Required FD Disclosure as directed by
the Securities and Exchange Commission.(c)
    
    Exhibits  3.1
    
    Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1994, File No.
95074277).3.2
    
    Amended and Restated Bylaws of the Registrant.10.1.1
    
    Amended and Restated Directors Discounted Stock Option Plan
(incorporated by reference to Exhibit 10.1.1 to the Registrants
Annual Report on form 10-K for the year ended December 31, 1999, File
No. 2-39729).10.1.2
    
    Agreement and Plan of Merger, dated December 29, 2003, among the
Company, COUNTRY Life Insurance Company and COUNTRY Medical Plans, Inc
(incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K for event occurring December 29, 2003, File No.
2-39729).10.2
    
    Performance Shares Awards Plan (incorporated by reference to
Exhibit 10.2 to the Registrants Registration Statement on Form S-8,
Registration No. 333-00795).10.3.1
    
    Amended and Restated 1983 Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.3.1 to the Registrants Annual Report on
Form 10-K for the year ended December 31, 1999, File No. 2-39729).10.3.2
    
    Form of Incentive Stock Option Agreement pursuant to the 1983
Incentive Stock Option Plan (incorporated by reference to Exhibit
10.3.2 to the Registrants Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 2-39729).10.3.3
    
    Amended and Restated Employment Agreement dated September 1, 2003
between the Company and Norma Christopher.21
    
    Subsidiaries of the Registrant.23
    
    Consents of independent auditors 71




---



##### Table of Contents



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
    
    Certification of the Companys Chief Executive Officer and Vice
President of Finance and Assistant Treasurer pursuant to Section 906
of the Sarbanes-Oxley Act of 200299.1
    
    Amended and Restated Stockholder Agreement, dated as of December
29, 2003, by and between the Company, COUNTRY Life Insurance Company
and Shield (incorporated by reference to Exhibit 99.1 from Schedule
13D/A filed by the Company with the Commission on January 6, 2004,
File No. 2-39729).All other exhibits are omitted as the required documents are
inapplicable.  (d)
    
    Financial Statement SchedulesThe following consolidated financial statement schedules and independent
auditors report thereon are included herein:  Report of Independent Auditors on Financial Statement Schedules
Schedule I - Consolidated Summary of Investments,   December 31,
2003
Schedule III - Supplementary Insurance Information,   Years
ended December 31, 2003, 2002 and 2001
Schedule IV - Reinsurance, Years ended December 31, 2003   2002
and 2001  All other schedules are omitted as the required information is inapplicable,
or the information is presented in the consolidated financial statements or
related notes. 72




---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of
Cotton States Life Insurance Company: We have audited the consolidated financial statements of Cotton States Life
Insurance Company and subsidiaries as of December 31, 2003 and 2002, and for
the years then ended, and have issued our report thereon dated February 13,
2004. Our audit also included the financial statement schedules as of December
31, 2003 and 2002, and for the years then ended, listed in Item 15. These
schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Atlanta, Georgia
February 13, 2004 73




---



##### Table of Contents



Independent Auditors Report The Board of Directors and Shareholders
Cotton States Life Insurance Company: Under date of March 14, 2003 we reported on the consolidated statements of
earnings, shareholders equity, cash flows, and comprehensive income of Cotton
States Life Insurance Company and subsidiaries (the Company) for the year
ended December 31, 2001, as contained in the annual report on Form 10-K for the
year ended December 31, 2003. In connection with our audit of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedules as listed in Item 15. The financial
statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audit. In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth herein. /s/ KPMG LLP
Atlanta, Georgia
March 14, 2003 74




---



##### Table of Contents



Schedule I Cotton States Life
Insurance Company and Subsidiaries
Consolidated Summary of Investments

December 31, 2003 Amount at WhichFair
    
    Shown on theType of Investments
    
    Cost
    
    Value
    
    Balance SheetFixed maturities, held for investment:Bonds:Public utilities
    
    $
    1,848,329
    
    
    
    1,940,736
    
    
    
    1,848,329All other corporate bonds
    
    
    1,500,044
    
    
    
    1,524,425
    
    
    
    1,500,044Total fixed maturities held for investment
    
    
    3,348,373
    
    
    
    3,465,161
    
    
    
    3,348,373Fixed maturities, available for sale:Bonds:United States government and government
agencies and authorities
    
    
    75,363,204
    
    
    
    76,550,699
    
    
    
    76,550,699Foreign governments
    
    
    5,125,223
    
    
    
    5,149,660
    
    
    
    5,149,660Public utilities
    
    
    3,976,110
    
    
    
    4,144,888
    
    
    
    4,144,888All other corporate bonds
    
    
    89,954,749
    
    
    
    92,864,103
    
    
    
    92,864,103Total fixed maturities available for sale
    
    
    174,419,286
    
    
    
    178,709,350
    
    
    
    178,709,350Equity securities
    
    
    2,752,977
    
    
    
    3,219,429
    
    
    
    3,219,429First mortgage loans on real estate
    
    
    1,028,395
    
    
    
    1,057,625
    
    
    
    1,028,395Policy loans
    
    
    10,706,565
    
    
    
    10,706,565
    
    
    
    10,706,565Other investments
    
    
    582,000
    
    
    
    582,000
    
    
    
    582,000Total investments
    
    $
    192,837,596
    
    
    
    197,740,130
    
    
    
    197,594,112
 75




---



##### Table of Contents



Schedule III Cotton States Life Insurance Company and Subsidiaries
Supplementary Insurance Information
December 31, 2003 and 2002 As of December 31, 2003 Deferred Policy
    
    Future Policy
    
    Claims andSegment
    
    Acquisition Costs
    
    Benefits
    
    Benefits PayableIndividual life insurance
    
    $
    44,938,459
    
    
    
    151,884,680
    
    
    
    2,273,603Guaranteed issue and
simplified issue life
insurance
    
    
    18,829,091
    
    
    
    21,567,377
    
    
    
    867,726Brokerage
    
    
    
    
    
    
    
    
    
    
    Total segments
    
    
    63,767,550
    
    
    
    173,452,057
    
    
    
    3,141,329Group life insurance and
accident and health
insurance
    
    
    
    
    
    
    1,625,097
    
    
    
    385,713Total
    
    $
    63,767,550
    
    
    
    175,077,154
    
    
    
    3,527,042
 As of December 31, 2002 Deferred Policy
    
    Future Policy
    
    Claims andSegment
    
    Acquisition Costs
    
    Benefits
    
    Benefits PayableIndividual life insurance
    
    $
    42,334,335
    
    
    
    141,978,294
    
    
    
    1,852,632Guaranteed issue and
simplified issue life
insurance
    
    
    15,352,075
    
    
    
    16,984,622
    
    
    
    1,041,037Brokerage
    
    
    
    
    
    
    
    
    
    
    Total segments
    
    
    57,686,410
    
    
    
    158,962,916
    
    
    
    2,893,669Group life insurance and
accident and health
insurance
    
    
    
    
    
    
    1,461,191
    
    
    
    347,674Total
    
    $
    57,686,410
    
    
    
    160,424,107
    
    
    
    3,241,343
 Note
- Certain information has been omitted from this schedule but is
included in the accompanying notes to the consolidated financial
statements. 76




---



##### Table of Contents



Schedule IV Cotton States Life Insurance Company and Subsidiaries
Reinsurance
Years ended December 31, 2003, 2002, and 2001 PercentageCeded to
    
    Assumed
    
    
    
    
    
    Of AmountGross
    
    Other
    
    From Other
    
    Net
    
    AssumedAmount
    
    Companies
    
    Companies(1)
    
    Amount
    
    To net (1)Year ended December 31, 2003Life insurance inforce
    
    
    5,456,882,000
    
    
    
    1,526,821,000
    
    
    
    1,373,982,000
    
    
    
    5,304,043,000
    
    
    
    25.9Premiums:Life insurance
    
    
    39,035,310
    
    
    
    4,690,209
    
    
    
    1,451,886
    
    
    
    35,796,987
    
    
    
    40.6Accident/health insurance
    
    
    127,244
    
    
    
    42,125
    
    
    
    
    
    
    
    85,119
    
    
    
    Total
    
    
    39,162,554
    
    
    
    4,732,334
    
    
    
    1,451,886
    
    
    
    35,882,106
    
    
    
    40.5Year ended December 31, 2002Life insurance inforce
    
    
    5,287,804,000
    
    
    
    1,415,701,000
    
    
    
    1,278,934,000
    
    
    
    5,151,037,000
    
    
    
    24.8Premiums:Life insurance
    
    
    36,309,031
    
    
    
    4,515,508
    
    
    
    1,201,107
    
    
    
    32,994,630
    
    
    
    3.6Accident/health insurance
    
    
    132,742
    
    
    
    35,280
    
    
    
    
    
    
    
    97,462
    
    
    
    Total
    
    
    36,441,773
    
    
    
    4,550,788
    
    
    
    1,201,107
    
    
    
    33,092,092
    
    
    
    3.6Year ended December 31, 2001Life insurance inforce
    
    
    5,041,438,000
    
    
    
    1,333,597,000
    
    
    
    1,229,093,000
    
    
    
    4,936,934,000
    
    
    
    24.9Premiums:Life insurance
    
    
    33,524,955
    
    
    
    4,329,538
    
    
    
    923,435
    
    
    
    30,118,852
    
    
    
    3.1Accident/health insurance
    
    
    135,574
    
    
    
    33,689
    
    
    
    
    
    
    
    101,885
    
    
    
    Total
    
    
    33,660,529
    
    
    
    4,363,227
    
    
    
    923,435
    
    
    
    30,220,737
    
    
    
    3.1
  (1)
    
    All reinsurance assumed results from participation in federally
sponsored group pools. 77




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 J. Ridley Howard

Chairman of the Board of Directors/
    
    03/24/04
DATE
    
    William J. Barlow

Vice President of Finance
    
    03/24/04
DATEPresident and Chief Executive Officer
    
    
    
    and Assistant Treasurer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Carol D. Cherry

Director
    
    03/24/04
DATE
    
    Robert C. McMahan

Director
    
    03/24/04
DATEGaylord O. Coan

Director
    
    03/24/04
DATE
    
    Darrell D. Pittard

Director
    
    03/24/04
DATEThomas A. Harris

Director
    
    03/24/04
DATE
    
    Mathews D. Swift

Director
    
    03/24/04
DATEJ. Ridley Howard

Director
    
    03/24/04
DATE
    
    E. Jenner Wood, III

Director
    
    03/24/04
DATE
 78