---

---

United States
Securities and Exchange CommissionWashington, D.C. 20549

---

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Period Ended March 31, 2002

Commission File Number 1-14177

COBALT CORPORATION(Exact name of registrant as specified in its charter)

|Wisconsin                                      |  | 39-1931212                          
|---------------------------------------------- |  | ------------------------------------
|(State of incorporation)                       |  | (I.R.S. Employer
Identification No.)
|401 West Michigan Street, Milwaukee, Wisconsin |  | 53203-2896                          
|(Address of principal executive offices)       |  | (Zip Code)                          

(414) 226-6900(Registrant's telephone number, including area code)

Indicate
by check mark whether registrant (1) has filed all documents and reports required to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ý    No o

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:

Common
stock outstanding as of April 30, 2002 was 40,863,398.

---

---

---



COBALT CORPORATION

INDEX TO  QUARTERLY REPORT ON FORM 10-Q

For the Period Ended March 31, 2002

|                                                                                      |  |   
|------------------------------------------------------------------------------------- |  | --
|PART I                                                                                |  |   
|Financial Statements and Supplementary Data                                           |  | 3 
|Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 15
|Quantitative and Qualitative Disclosures about Market Risk                            |  | 24
|PART II                                                                               |  |   
|Other Information                                                                     |  | 25
|Signature Page                                                                        |  | 26

2

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PART 1. FINANCIAL INFORMATION  Item 1. Financial Statements

COBALT CORPORATION  CONSOLIDATED BALANCE SHEETS

|                                    |                                                 | March 31,
2002 |                      | December 31,
2001
|----------------------------------- | ----------------------------------------------- | -------------- | -------------------- | -----------------
|
|
|ASSETS                              |                                                 |                |                      |                  
|Current assets:                     |                                                 |                |                      |                  
|                                    | Cash and cash equivalents                       |                | $                    | 49,200           
|                                    | Investmentsavailable-for-sale, at fair value   |                |                      | 204,843          
|                                    | Due from affiliates                             |                |                      | 5,218            
|                                    | Premium receivables                             |                |                      | 31,377           
|                                    | Due from clinics and providers                  |                |                      | 7,101            
|                                    | Other receivables                               |                |                      | 56,875           
|                                    | Prepaid expenses and other current assets       |                |                      | 37,696           
|                                    |                                                 |                |                      |                  
|                                    |                                                 |                | Total current assets |                  
|Noncurrent assets:                  |                                                 |                |                      |                  
|                                    | Investmentsheld-to-maturity, at amortized cost |                |                      | 10,979           
|                                    | Investments in affiliates, net                  |                |                      | 64,628           
|                                    | Property and equipment, net                     |                |                      | 31,813           
|                                    | Goodwill, net                                   |                |                      | 89,087           
|                                    | Prepaid pension                                 |                |                      | 55,269           
|                                    | Deferred income taxes                           |                |                      | 32,275           
|                                    | Other noncurrent assets                         |                |                      | 55,324           
|Assets from discontinued operations |                                                 |                |                     |                  
|                                    |                                                 |                |                      |                  
|Total assets                        |                                                 | $              | 731,685              |                  
|                                    |                                                 |                |                      |                  

See
Notes to Interim Consolidated Financial Statements.

3

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COBALT CORPORATION  CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                          | March 31,
2002 |                            | December 31,
2001 |  
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | -------------- | -------------------------- | ----------------- | -
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY       |                                                                                                                                          |                |                            |                   |  
|Current liabilities:                       |                                                                                                                                          |                |                            |                   |  
|                                           | Medical and other benefits payable                                                                                                       |                | $                          | 196,181           |  
|                                           | Advance premiums                                                                                                                         |                |                            | 87,755            |  
|                                           | Due to affiliates                                                                                                                        |                |                            | 265               |  
|                                           | Payables and accrued expenses                                                                                                            |                |                            | 51,152            |  
|                                           | Short-term debt                                                                                                                          |                |                            | 12,315            |  
|                                           | Other current liabilities                                                                                                                |                |                            | 38,571            |  
|                                           |                                                                                                                                          |                |                            |                   |  
|                                           |                                                                                                                                          |                | Total current liabilities  |                   |  
|Noncurrent liabilities:                    |                                                                                                                                          |                |                            |                   |  
|                                           | Other benefits payable                                                                                                                   |                |                            | 48,121            |  
|                                           | Deferred income taxes                                                                                                                    |                |                            | 32,275            |  
|                                           | Postretirement benefits other than pension                                                                                               |                |                            | 18,207            |  
|                                           | Other noncurrent liabilities                                                                                                             |                |                            | 17,196            |  
|Liabilities from discontinued operations   |                                                                                                                                          |                |                           |                   |  
|                                           |                                                                                                                                          |                |                            |                   |  
|                                           |                                                                                                                                          |                | Total liabilities          |                   |  
|Shareholders' equity:                      |                                                                                                                                          |                |                            |                   |  
|                                           | Common stock (no par value, no stated value, 48,616,289 issued, 7,949,904 held in treasury and 40,666,385 outstanding at March 31, 2002) |                |                            | 249,921           |  
|                                           | Retained deficit                                                                                                                         |                |                            | (18,010           | )
|                                           | Accumulated other comprehensive income (loss)                                                                                            |                |                            | (2,264            | )
|                                           |                                                                                                                                          |                |                            |                   |  
|                                           |                                                                                                                                          |                | Total shareholders' equity |                   |  
|                                           |                                                                                                                                          |                |                            |                   |  
|Total liabilities and shareholders' equity |                                                                                                                                          | $              | 731,685                    |                   | $
|                                           |                                                                                                                                          |                |                            |                   |  

See
Notes to Interim Consolidated Financial Statements.

4

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COBALT CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)

|                                                        |                                                     | Three months ended
March 31, |                  
|------------------------------------------------------- | --------------------------------------------------- | ---------------------------- | -----------------
|
|
|Revenues:                                               |                                                     |                              |                  
|                                                        | Health services revenue:                            |                              |                  
|                                                        |                                                     | Premium                      |                  
|                                                        |                                                     | Government contract fees     |                  
|                                                        |                                                     | Other                        |                  
|                                                        | Investment results                                  |                              |                  
|                                                        |                                                     |                              |                  
|                                                        |                                                     |                              | Total revenues   
|Expenses:                                               |                                                     |                              |                  
|                                                        | Medical and other benefits                          |                              |                  
|                                                        | Selling, general, administrative and other          |                              |                  
|                                                        | Interest                                            |                              |                  
|                                                        | Amortization of goodwill                            |                              |                  
|                                                        |                                                     |                              |                  
|                                                        |                                                     |                              | Total expenses   
|                                                        |                                                     |                              |                  
|Operating income from continuing operations             |                                                     |                              | 11,572           
|Income (loss) from investment in affiliates, net of tax |                                                     |                              | 2,852            
|                                                        |                                                     |                              |                  
|Pretax income from continuing operations                |                                                     |                              | 14,424           
|Income tax expense                                      |                                                     |                              | 1,180            
|                                                        |                                                     |                              |                  
|Income from continuing operations                       |                                                     |                              | 13,244           
|Income from discontinued operations:                    |                                                     |                              |                  
|                                                        | Loss from discontinued operations, net of tax       |                              |                  
|                                                        | Gain on sale of discontinued operations, net of tax |                              |                  
|                                                        |                                                     |                              |                  
|Net income                                              |                                                     | $                            | 22,603           
|                                                        |                                                     |                              |                  
|Earnings per share:                                     |                                                     |                              |                  
|                                                        | Basic EPS from continuing operations                |                              | $                
|                                                        | Basic EPS from discontinued operations              |                              |                  
|                                                        |                                                     |                              |                  
|                                                        |                                                     |                              | Total basic EPS  
|                                                        |                                                     |                              |                  
|                                                        | Diluted EPS from continuing operations              |                              | $                
|                                                        | Diluted EPS from discontinued operations            |                              |                  
|                                                        |                                                     |                              |                  
|                                                        |                                                     |                              | Total diluted EPS
|                                                        |                                                     |                              |                  

See
Notes to Interim Consolidated Financial Statements.

5

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COBALT CORPORATION  CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND  COMPREHENSIVE INCOME (LOSS)(UNAUDITED)

|                             |                                        | Common Shares
Outstanding                                    |                      | Common Stock |         | Retained
Earnings
(Deficit) |   | Accumulated
Other
Comprehensive
Income (Loss) |       | Total
Shareholders'
Equity |       
|---------------------------- | -------------------------------------- | ------------------------------------------------------------ | -------------------- | ------------ | ------- | --------------------------- | - | --------------------------------------------- | ----- | -------------------------- | ------
|
|Balance at December 31, 2001 |                                        | 40,593,043                                                   |                      | $            | 249,566 |                             | $ | (41,979                                       | )     | $                          | 635   
|                             | Issuance of common stockoptions       |                                                              | 29,292               |              |         | 105                         |   |                                               |      |                            |       
|                             | Issuance of common stock401(k)        |                                                              | 44,050               |              |         | 250                         |   |                                               |      |                            |       
|                             | Change in ownership of affiliates      |                                                              |                     |              |         |                            |   |                                               | 1,322 |                            |       
|                             | Conversion of SAR's to optionsvesting |                                                              |                     |              |         |                            |   |                                               | 44    |                            |       
|                             | Comprehensive income:                  |                                                              |                      |              |         |                             |   |                                               |       |                            |       
|                             |                                        | Net income                                                   |                      |             |         |                             |  |                                               |       | 22,603                     |       
|                             |                                        | Change in unrealized gains/losses on investments, net of tax |                      |             |         |                             |  |                                               |       |                           |       
|                             |                                        |                                                              |                      |              |         |                             |   |                                               |       |                            |       
|                             |                                        |                                                              | Comprehensive income |              |         |                             |   |                                               |       |                            |       
|                             |                                        |                                                              |                      |              |         |                             |   |                                               |       |                            |       
|Balance at March 31, 2002    |                                        | 40,666,385                                                   |                      | $            | 249,921 |                             | $ | (18,010                                       | )     | $                          | (2,264
|                             |                                        |                                                              |                      |              |         |                             |   |                                               |       |                            |       

See
Notes to Interim Consolidated Financial Statements

6

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COBALT CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

|                           |                                                                                             | Three months ended
March 31,                                                                                             |                                   
|-------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ----------------------------------
|
|
|Operating activities:      |                                                                                             |                                                                                                                          |                                   
|                           | Income from continuing operations                                                           |                                                                                                                          | $                                 
|                           | Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                                                                                          |                                   
|                           |                                                                                             | Depreciation and amortization                                                                                            |                                   
|                           |                                                                                             | (Income) loss from investment in affiliates, net of tax                                                                  |                                   
|                           |                                                                                             | Realized investment (gains) losses                                                                                       |                                   
|                           |                                                                                             | Deferred income taxes                                                                                                    |                                   
|                           |                                                                                             | Changes in operating accounts, net of discontinued operations, acquisitions and conversion/combination related activity: |                                   
|                           |                                                                                             |                                                                                                                          | Premium receivables               
|                           |                                                                                             |                                                                                                                          | Other receivables                 
|                           |                                                                                             |                                                                                                                          | Due from clinics and providers    
|                           |                                                                                             |                                                                                                                          | Medical and other benefits payable
|                           |                                                                                             |                                                                                                                          | Advance premiums                  
|                           |                                                                                             |                                                                                                                          | Due to/from affiliates, net       
|                           |                                                                                             |                                                                                                                          | Other, net                        
|                           |                                                                                             |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|Investing activities:      |                                                                                             |                                                                                                                          |                                   
|                           | Acquisitions and combination activity                                                       |                                                                                                                          |                                   
|                           | Proceeds from sale of shares in unconsolidated affiliate                                    |                                                                                                                          |                                   
|                           | Proceeds from sale of discontinued operations                                               |                                                                                                                          |                                   
|                           | Purchases of available-for-sale investments                                                 |                                                                                                                          |                                   
|                           | Proceeds from maturity of held-to-maturity investments                                      |                                                                                                                          |                                   
|                           | Proceeds from sale and maturity of available-for-sale investments                           |                                                                                                                          |                                   
|                           | Additions to property and equipment, net                                                    |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|Financing activities:      |                                                                                             |                                                                                                                          |                                   
|                           | Proceeds from issuance of common stock                                                      |                                                                                                                          |                                   
|                           | Net repayments of debt                                                                      |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|Discontinued Operations:   |                                                                                             |                                                                                                                          |                                   
|                           | Cash flows from discontinued operations                                                     |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|Cash and cash equivalents: |                                                                                             |                                                                                                                          |                                   
|                           | Increase (decrease) during period                                                           |                                                                                                                          |                                   
|                           | Balance at beginning of year                                                                |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   
|                           |                                                                                             |                                                                                                                          |                                   

See
Notes to Interim Consolidated Financial Statements.

7

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COBALT CORPORATION  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)

March 31, 2002

Note A. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for
the year ended December 31, 2001 and footnotes thereto included in the Cobalt Corporation ("Cobalt" or the "Company") annual report on Form 10-K, as filed with the Securities
and Exchange Commission ("SEC").

Cobalt
(formerly known as United Wisconsin Services, Inc. ("UWS")) was created as a result of the combination of UWS and Blue Cross & Blue Shield United of Wisconsin
("BCBSUW") on March 23, 2001 (the "Combination"). On that date, BCBSUW converted from a service insurance corporation to a stockholder owned corporation. Upon conversion, BCBSUW became a
wholly-owned subsidiary of UWS through the combination of the two companies. At the time of conversion and the Combination, BCBSUW owned approximately 46.6% of UWS' outstanding common stock. In
exchange for the ownership of BCBSUW, Cobalt issued 31,313,390 shares of newly issued Company common stock to the
Wisconsin United for Health Foundation, Inc. (the "Foundation"). The Foundation was established for the sole purpose of benefiting public health in Wisconsin from its earnings in the investment
in Cobalt.

The
Combination was accounted for as a purchase by BCBSUW of the remaining 9,096,303 shares of UWS that it did not already own at a market price of $6.15 per share on the closing date.
In accordance with GAAP, goodwill was recorded representing the excess of the market price over the adjusted book value of UWS for the 53.4% of UWS that BCBSUW did not already own. For reporting
purposes, the Combination is treated as a reverse purchase transaction, whereby BCBSUW becomes the acquirer and reporting entity for public company reporting. Therefore, the accompanying unaudited
interim consolidated financial statements present the Company's financial position as of March 31, 2002 and December 31, 2001, reflecting the purchase accounting adjustments for the
Combination and include the accounts of both UWS and BCBSUW. The consolidated statements of operations, cash flows, and changes in shareholders' equity and comprehensive income (loss) for the three
month period ended March 31, 2002, reflect the operations of the combined UWS and BCBSUW entities. Prior to March 31, 2001, the consolidated financial statements include only the
operations of BCBSUW and its wholly-owned subsidiary, United Government Services, LLC ("UGS") and minority interest in UWS and American Medical Security Group, Inc. ("AMSG"). For purposes of
calculating earnings per common share ("EPS") of the Company, the 7,949,904 shares of Cobalt common stock owned by BCBSUW are accounted for as if it were treasury stock. The March 31, 2001 pro
forma statement of operations for Cobalt presented in Note E. includes the operations of the former UWS and BCBSUW with elimination of intracompany transactions, the recording of purchase
accounting adjustments and the amortization of goodwill calculated as if the transaction was completed at the beginning of the reporting period.

8

---

Continuing
operations in the consolidated financial statements subsequent to the Combination include the accounts of the Company's majority owned insurance subsidiaries (BCBSUW, Compcare
Health Services Insurance Corporation ("Compcare"), Unity Health Plans Insurance Corporation ("Unity"), Valley Health Plan, Inc. ("Valley"), United Wisconsin Insurance Company ("UWIC"), and
United Heartland Life Insurance Company ("UHLIC")) and other non-insurance subsidiaries (UGS, Meridian Resource Company, LLC ("MRC"), Comprehensive Receivables Group, Inc. ("CRG"),
United Wisconsin Proservices, Inc. ("Proservices"), United Heartland, Inc. ("UHI") and C.C. Holdings, LLC ("CC Holdings")). All intracompany balances and transactions after
March 31, 2001 have been eliminated in consolidation.

Note B. Discontinued Operations

On March 29, 2002, Cobalt and certain affiliates sold 100% of the membership interest of its subsidiary, Innovative Resource Group, LLC ("IRG"), for
$27 million ($17 million in cash and $10 million in a three-year note). IRG was one of Cobalt's specialty companies, which provided behavioral health and medical
management services. Accordingly, IRG is accounted for as a discontinued operation for all periods presented. As part of this transaction, IRG assumed the lease of one of Cobalt's affiliates with
monthly lease payments of approximately $0.1 million and a termination date of May 31, 2010. IRG also transferred to Cobalt leases for three facilities, which had lease commitments of
approximately $0.7 million in 2002 and $0.2 million in 2003. The purchase agreement also provides for certain bonuses/penalties to be received/paid between IRG and Cobalt based on
revenues generated from Cobalt and affiliated entities in future years. Lastly, certain affiliates of Cobalt will enter into seven-year service agreements for the provision of services by
IRG.

The
net gain on disposition of discontinued operations was $9.4 million, which includes a realized gain on the sale of $9.9 million, offset by a $0.5 million loss on
IRG's operations for the three months ended March 31, 2002. The net gain on the sale will be adjusted accordingly, based on any payments made in future periods in accordance with the purchase
and sale agreement. Subsequent to the Conversion, there were no operations to report for discontinued operations for the first quarter of 2001, since IRG was not considered part of Cobalt for
financial reporting purposes until the second quarter of 2001.

Note C. Net Income (Loss) Per Share

Basic EPS are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS are computed by
dividing net income by the weighted average number of common shares outstanding, adjusted for the effect of dilutive securities for stock options where the exercise price was less than the average
market price of the outstanding common shares for the period. When Cobalt reports a net loss, potentially dilutive securities are not included in the calculation of EPS because their inclusion would
have an antidilutive effect.

The
weighted average number of common shares outstanding used in the calculation of basic EPS is 40,637,194 for the three months ended March 31, 2002. The weighted average number
of common shares outstanding used in the calculation of diluted EPS is 40,967,943 for the three months ended March 31, 2002, which includes options to purchase 1,411,514 shares for which the
options' exercise prices were less than the average market price of the outstanding shares. The remaining options to purchase 2,220,930 common shares were excluded from the computation of diluted EPS
for the three months ended March 31, 2002, since the options' exercise prices were greater than the average market price of the outstanding common shares.

9

---

Note D. Management's Plan

In order to assure the Company's regulated insurance subsidiaries continue to satisfy minimum capital and liquidity requirements, the Office of the Commissioner
of Insurance of the State of Wisconsin ("OCI") requested, management developed and the Cobalt Board of Directors approved a capital plan at the end of 2001 to improve the Company's position relative
to minimum capital and liquidity requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on the capital plan.

Note E. Pro forma Financial Information (Unaudited)

The March 31, 2001 pro forma statement of operations for Cobalt includes the operations of the former UWS and BCBSUW with elimination of intracompany
transactions, the recording of purchase
accounting adjustments and the amortization of goodwill calculated as if the combination was completed at the beginning of the reporting period.

PRO FORMA COBALT STATEMENT OF OPERATIONS

Three months ended
March 31, 2001(In thousands, except share data)Revenues:Health services revenue:Premium

$
366,869Government contract fees


26,903Other


12,337Investment results


3,483Total revenues


409,592Expenses:Medical and other benefits


320,407Selling, general, administrative and other


83,342Interest


183Amortization of goodwill


1,515Total expenses


405,447Operating income from continuing operations


4,145Loss from investment in affiliates, net of tax


(2,285
)Pre-tax income from continuing operations


1,860Income tax expense


297Income from continuing operations


1,563Income from discontinued operations, net of tax


171Net income

$
1,734Earnings per share:Diluted EPS from continuing operations

$
0.04Diluted EPS from discontinued operations


Total diluted EPS

$
0.04Weighted average shares outstanding:Basic


40,412,393Diluted


40,585,385


10

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PRO FORMA MEMBERSHIP ANALYSIS

March 31, 2001Membership at end of period:Insured medical products

553,351Specialty managed care products and services

616,750Self-funded products:Non-HMO

173,295HMO

5,979Total membership

1,349,375Workers' Compensation  Policies in force

735Membership (as a percentage of the total):Insured medical products

41.0
%Specialty managed care products and services

45.7Self-funded products:Non-HMO

12.8HMO

0.5Total membership

100.0
%Members from discontinued operations

1,452,072


Note F. Investment in AMSG Affiliate

On March 22, 2002, AMSG repurchased from Cobalt 1,400,000 shares of AMSG common stock at a price of $13 per share, thus reducing the Company's ownership
percentage in AMSG to approximately 39%. The aggregate proceeds from the sale were invested in fixed income securities. In April 2002, AMSG filed a resale registration statement with the SEC
for the sale of an additional 3,500,000 shares (up to 4,025,000 shares if certain over allotment options are exercised) of AMSG common stock currently owned by Cobalt. If all offered shares are sold,
Cobalt's ownership percentage will be less than 12% and the investment in AMSG will no longer be accounted for under the equity method and will be carried at market value and classified as
available-for-sale.

Condensed
Statements of Operations as reported by AMSG (NYSE: AMZ):

Three months ended
March 31,2002

2001(In thousands)Premium revenue

$
194,401

$
222,470Medical and other benefits


131,800


166,580Underwriting gain


62,601


55,890Net income (loss)


5,430


(5,140
)


As
of March 31, 2002 and 2001, Cobalt owned 39.0% and 44.8%, respectively, of the outstanding shares of common stock of AMSG.

11

---

Note G. Comprehensive Income (Loss)

A reconciliation from net income (loss) reported in the Consolidated Statements of Operations to comprehensive income (loss) is stated below:

Three months ended
March 31,2002

2001(In thousands)Net income (loss) per consolidated statements of operations

$
22,603

$
1,284Change in unrealized loss on investments, net of taxes


(2,899
)

1,741Comprehensive income (loss)

$
19,704

$
3,025


Comprehensive
income (loss) is defined as all changes in equity during the period except those resulting from shareholder equity contributions and distributions.

Note H. Segment Reporting

The Company has four reportable business segments: insured medical products, specialty managed care products and services (previously reported as two separate
segments, specialty risk and specialty service), government services and self-funded products. Insured medical products include: full coverage, copayment, preferred provider organization,
Medicare supplement, interim coverage, health maintenance organization ("HMO") and point of service products sold primarily in Wisconsin. The specialty managed care products and services segment
includes dental, life, disability and workers' compensation products, along with electronic claim submission services, subrogation and hospital bill audit services and receivables management services.
The specialty managed care products and services are sold throughout the United States. The self-funded products consist of administrative services and access to Cobalt's extensive
provider networks for uninsured contracts. Government services include processing services for Medicare providers throughout the United States and for Medicaid in the State of Wisconsin.

"Other
continuing operations" include activities not directly related to the business segments, unallocated corporate items (i.e. gain (loss) from investment in affiliates, amortization
of goodwill for periods prior to January 1, 2002 and unallocated overhead expenses) and intracompany eliminations. The Company evaluates segment performance based on profit or loss from
operations before income taxes. The accounting policies of the reportable segments are the same as those described in the Company's December 31, 2001 audited financial statements in the summary
of significant accounting policies.

Financial
data for continuing operations by segment is as follows:

Three months ended
March 31,2002

2001(In thousands)Health services revenue:Insured medical products

$
305,127

$
143,318Specialty managed care products and services


45,328


7,484Government services


28,809


26,903Self-funded products


7,233


7,702Other continuing operations


(8,458
)

(780
)Total consolidated

$
378,039

$
184,627


12

---

Three months ended
March 31,2002

2001(In thousands)Investment results:Insured medical products

$
3,188

$
1,898Specialty managed care products and services


1,407


99Government services


124


143Self-funded products


4


15Other continuing operations


(1,792
)

(91
)Total consolidated

$
2,931

$
2,064Pre-tax income (loss):Insured medical products

$
6,502

$
6,895Specialty managed care products and services


2,777


93Government services


656


341Self-funded products


348


(1,540
)Other continuing operations:Corporate holding company


1,289


(2,654
)Income from investment in affiliates, net of tax


2,852


(1,851
)Total consolidated

$
14,424

$
1,284


March 31,
2002

December 31,
2001(In thousands)Total assets:Insured medical products

$
546,932

$
521,249Specialty managed care products and services


81,229


69,556Government services


25,946


26,843Self-funded products


12,950


10,891Other continuing operations


64,628


79,466Total consolidated

$
731,685

$
708,005


Total
assets (excluding government services assets and investment in affiliates) are allocated by segment based on the percentage of revenue for the three months ended March 31,
2002 and pro forma revenues for the year ended December 31, 2001. Investment in unconsolidated affiliates is classified in other operations. Reclassifications have been made to the previously
disclosed information to conform with the reporting of discontinued operations.

Transactions
with other operating segments are as follows:

Three months ended
March 31,2002

2001(In thousands)Health services revenue:Insured medical

$
(3,194
)
$
(780
)Specialty managed care products and services


(5,209
)

Self-funded products


(55
)

Investment results:Insured medical products


(1,757
)




13

---

Note I. Recent Accounting Pronouncements

On January 1, 2002, the Company adopted the Statement of Financial Accounting Standards Board ("FASB") No. 142, "Goodwill and Other Intangible
Assets". Under the new statement, goodwill is no longer amortized but is subject to annual impairment tests in accordance with the standard. Based on management's review of the impact of adopting this
standard, any impairment charges will be reported as a cumulative effect of a change in accounting principle. However, this analysis has not been completed to date. Total goodwill amortization on
continuing operations for 2001 was $5.1 million, of which $0.2 million was recorded for the first quarter of 2001. On a pro forma basis, goodwill amortization for 2001 would have been
$6.5 million, of which $1.5 million would have been recorded in the first quarter of 2001. Based on the Company's management plan (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations") to reduce its ownership in AMSG, it is unclear at this time if the Company would have to take any additional writedown of the carrying value of its investment in
AMSG.

On
January 1, 2002, the Company also adopted FASB No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement modifies existing
guidance governing the accounting for dispositions of company assets as discontinued operations in the accompanying consolidated financial statements. Refer to Note B. for Discontinued
Operations of the Company.

Note J. Reclassifications

Certain reclassifications have been made to the consolidated financial statements for 2001 to conform with the 2002 presentation, specifically regarding
discontinued operations.

14

---



COBALT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Cobalt Corporation ("Cobalt" or the "Company") (formerly known as United Wisconsin Services, Inc. ("UWS")) was created as a result of the combination of
UWS and Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") on March 23, 2001 (the "Combination"). See Note A., Basis of Presentation, for further discussion on the
Combination.

The
Company offers full coverage, co-payment, preferred provider organization ("PPO") and health maintenance organization ("HMO") products to groups, along with Medicare
supplement, PPO and interim coverage options to individuals. The Company's subsidiary, BCBSUW, is the only health insurer in the state operating full-service regional sales and customer
service centers. Through United Government Services, LLC ("UGS"), the Company is a government contractor and processes Medicare claims for providers in all 50 states and is currently the largest
Part A Medicare processor in the nation. The Company is also a leading provider of managed health care services and employee benefit products, HMO products, dental, life, disability and
workers' compensation products, electronic claim submission services, subrogation and hospital bill audit services and receivables management services.

In
the discussion to follow, the number of "members" is equivalent to the number of persons covered by contracts in force.

Summary of Membership and Ratios

March 31,2002

2001(1)Membership at end of period:Insured medical products

469,784

246,675Specialty managed care products and services

575,892

142,531Self-funded products:Non-HMO

165,174

173,295HMO

5,204

Total membership

1,216,054

562,501Workers' Compensation  Policies in force

754

Membership (as a percentage of the total):Insured medical products

38.6
%
43.9
%Specialty managed care products and services

47.4

25.3Self-funded products:Non-HMO

13.6

30.8HMO

0.4

Total membership

100.0
%
100.0
%Members from discontinued operations

1,567,681




---

15

---

Summary of Operating Results and Ratios

Three months ended
March 31,2002

2001(1)(In thousands)Revenue:Insured medical products

$
305,127

$
143,318Specialty managed care products and services


45,328


7,484Government services


28,809


26,903Self-funded products


7,233


7,702Intracompany eliminations


(8,458
)

(780
)Total health services revenue


378,039


184,627Investment results


2,931


2,064Total revenue

$
380,970

$
186,691Health services revenue (as a percentage of the total):Insured medical products


80.7
%

77.6
%Specialty managed care products and services


12.0


4.0Government services


7.6


14.6Self-funded products


1.9


4.2Intracompany eliminations


(2.2
)

(0.4
)Total


100.0
%

100.0
%Operating ratios:Insured medical loss ratio(2)


87.9
%

86.0
%Selling, general, administrative and other expense ratios:Insured medical ratio(3)


10.8
%

10.3
%Government services ratio(4)


98.2
%

99.3
%Combined loss and expense ratio:Specialty managed care products and services ratio(5)


96.7
%

100.0
%


---

Cobalt's revenues are derived primarily from premiums, while medical benefits constitute the majority of expenses. Profitability is directly affected by many
factors including, among others, premium rate adequacy, estimates of medical benefits, health care utilization, effective administration of benefit payments, operating efficiency, investment returns
and federal and state laws and regulations.

16

---

Invested Assets

The table below reflects investment results for the periods indicated:

Three months ended
March 31,2002

2001(Dollars in thousands)Average invested assets(1)

$
231,604

$
37,196Net investment income(2)


2,776


592Net realized gains (losses)


104


(1
)Net unrealized gains (losses) on stocks and bonds


(2,899
)

1,741Average yield


4.79
%

6.37
%


---

Results of Operations

Total Revenues

Total revenues for the three months ended March 31, 2002 increased 104.1% to $381.0 million from $186.7 million for the three months ended
March 31, 2001. This increase was due primarily to the addition of the UWS business, which resulted from the Combination. Also contributing to the increase was premium rate increases on medical
insurance business.



Insured Medical.Insured medical revenue for the three months ended March 31, 2002 increased 112.9% to
$305.1 million from $143.3 million for the three months ended March 31, 2001. The number of insured medical members as of March 31, 2002 increased 90.4% to 469,784 from
246,675 as of March 31, 2001. The increase in both premium revenues and membership is primarily due to the addition of the UWS business, which contributed 233,634 members, offset by a slight
decrease of 10,525 in BCBSUW membership. Also contributing to the increase is an overall increase in premium per member per month for BCBSUW of approximately 12%.

Specialty Managed Care Products and Services.Specialty managed care products and services revenue for the three months ended
March 31, 2002 increased 504.0% to $45.3 million from $7.5 million for the three months ended March 31, 2001. This increase is due primarily to the addition of the UWS
business as a result of the Combination. Total revenue of $7.5 million for the three months ended March 31, 2001 includes only premium revenue from the BCBSUW insured dental business. In
comparison, total revenue of $45.3 million for the three months ended March 31, 2002 includes combined premium revenue of $6.5 million for the BCBSUW insured dental business and
$29.8 million for the UWS dental, disability, life and accidental death and dismemberment ("AD&D") business, and other revenues of $9.0 million related to the UWS workers' compensation
third party administrator ("TPA") business, receivables management, subrogation, hospital bill audit and electronic claims services. The number of specialty managed care products and services members,
which relate to the dental, disability, life and AD&D insurance business increased 304.0% to 575,892 as of March 31, 2002 from 142,531 as of March 31, 2001, also due primarily to the
Combination.

Government Services.Government services revenue for the three months ended March 31, 2002 increased 7.1% to
$28.8 million from $26.9 million for the three months ended March 31, 2001. The increase in revenues from 2001 to 2002 is primarily attributable to an increase in administrative
fees charged to Medicare and other government programs. The amount of these fees is determined in part based on allowable expenses incurred by UGS in administering these programs. The increase in 2002
revenues is the result of increases in these allowable expenses, primarily related to annual increases in salaries and other compensation expenses, which are charged back to these programs.

17

---

Self-funded Products.Self-funded administrative fees for the three months ended March 31,
2002 decreased 6.5% to $7.2 million from $7.7 million for the three months ended March 31, 2001. The decrease is primarily attributable to a reduction in the number of
non-HMO self-funded members to 165,174 as of March 31, 2002 from 173,295 as of March 31, 2001. The reduction in membership is the effect of the Company repricing
the self-funded business in order to eliminate unprofitable business.



Net investment results include investment income and realized gains (losses) on the sale of investments. Net investment results for the three months ended
March 31, 2002 increased 38.1% to $2.9 million from $2.1 million for the three months ended March 31, 2001. The Company recognized an increase in net investment income from
invested assets (cash, cash equivalents, bonds, stocks and other invested assets) of $2.2 million from $0.6 million for the three months ended March 31, 2001 to
$2.8 million for the three months ended March 31, 2002, primarily due to the addition of UWS. In addition, realized gains increased to $0.1 million for the three months ended
March 31, 2002 compared with an insignificant realized loss for the three months ended March 31, 2001. However, offsetting this increase was the elimination of BCBSUW investment income
related to intracompany financing arrangements with UWS, subsequent to March 31, 2001, due to the Combination. This intracompany investment income amounted to $1.3 million for the three
months ended March 31, 2001. Average annual investment yields, excluding net realized gains, investment income from affiliates and other interest income were 4.79% for the three months ended
March 31, 2002 and 6.37% for the three months ended March 31, 2001.

Average
invested assets for the three months ended March 31, 2002 increased to $231.6 million, compared to $37.2 million (excluding UWS) for the three months ended
March 31, 2001. The increase in 2002 is due in large part to the Combination, which increased invested assets by $135.9 million as of March 31, 2001. Additionally, proceeds from
the sale of Innovative Resource Group, LLC ("IRG") and the sale of 1.4 million shares of common stock of American Medical Security Group, Inc. ("AMSG"), both during the first quarter of 2002,
combined with favorable operating cash flows for the year ended December 31, 2001 also contributed to the increase in invested assets.

Expense Ratios

Loss Ratio.The insured medical loss ratio for the three months ended March 31, 2002 was 87.9% compared with 86.0% for
the three months ended March 31, 2001. The increase in the medical loss ratio for the first quarter of 2002 is primarily the result of the addition of the UWS insured medical business, which
has run at a higher loss ratio than the BCBSUW insured medical business.

Selling, General, Administrative and Other Expense Ratio.The selling, general, administrative and other ("SGA") expense
ratio includes commissions, administrative expenses, premium taxes and other assessments and claim interest expense. For non-insurance subsidiaries, SGA includes operating expenses only.

The
insured medical SGA expense ratio for the three months ended March 31, 2002 was 10.8% compared with 10.3% for the three months ended March 31, 2001. The slight increase
in the SGA expense ratio for the three months ended March 31, 2002 is primarily due to changes in the mix of business due to the addition of the UWS insured medical business and the reduction
in HMO membership due to the exit of unprofitable business in December 2001 and January 2002.

The
combined loss and expense ratio for specialty managed care products and services for the three months ended March 31, 2002 improved to 96.7% from 100.0% for the three months
ended March 31, 2001. The improvement in 2002 is due to the addition of the UWS specialty managed care products and services, particularly the service related products such as subrogation,
hospital bill audit and electronic claims services, which have run at a lower overall operating expense ratio than the combined loss and expense ratio for the specialty insurance lines. The ratio for
the three months ended March 31, 2001 is comprised entirely of the loss and expense ratio for the BCBSUW insured dental business.

18

---

The
expense ratio for government services for the three months ended March 31, 2002 improved to 98.2% from 99.3% for the three months ended March 31, 2001, due to the
effect of higher expenses in 2001 related to the implementation of new Medicare government contracts awarded and the renewal of existing Medicaid contracts with increased funding. Effective
December 1, 2000, UGS became the Medicare Part A Intermediary for the states of California, Nevada and Hawaii, and the territories of Guam, Mariana Islands and American Samoa. In
addition, also effective December 1, 2000, UGS became the Regional Home Health Intermediary for the states of California, Nevada, Arizona, Hawaii, Oregon, Idaho, Washington, and Alaska, and the
territory of Guam. Also, UGS incurred additional operating expenses in 2001 related to the consolidation of claim processing systems in order to gain greater operational efficiencies. These
initiatives are substantially complete as of March 31, 2002.

Other Expenses

The Company has a bank line-of-credit ("LOC"), in which certain subsidiaries, excluding the corporate holding company, can participate.
The LOC permits aggregate borrowings up to $20.0 million, with company specific maximums for the participating companies. In addition, the Company has a term business note ("term note") for the
corporate holding company with a commercial bank for $7.5 million originated on December 31, 2001. Interest expense on the credit arrangements discussed above totaled $0.2 million
for the three months ended March 31, 2002. There was no interest expense on debt for the three months ended March 31, 2001.

As
a result of the adoption of Statement of Financial Accounting Standards Board ("FASB") No. 142 on January 1, 2002, there was no goodwill amortization recorded for the
three months ended March 31, 2002, compared with goodwill amortization of $0.2 million recorded for the three months ended March 31, 2001. Goodwill amortization recorded for the
three months ended March 31, 2001 primarily represents amortization related to the 1999 purchase by BCBSUW of 1.4 million additional shares of UWS stock, which was amortized on a
straight-line basis over a period of 15 years. The reduction in goodwill on the consolidated balance sheet as of March 31, 2002 from December 31, 2001 reflects
adjustments to the goodwill recorded at the Combination related to the recognition of a valuation allowance on the net deferred income tax assets recorded by UWS prior to the Combination. The
goodwill was adjusted downward during the first quarter of 2002 by $3.0 million due to the utilization of the related UWS net operating losses to offset pre-tax earnings.

The
SGA expenses for the three months ended March 31, 2002 were reduced by a favorable vendor settlement of $3.8 million. This settlement was offset by other
non-recurring charges to increase litigation reserves of $1.2 million, thus resulting in a net favorable settlement of $2.6 million, which was primarily recorded at the
corporate holding company. The SGA expenses for the three months ended March 31, 2002 also include a $0.7 million severance accrual recorded at the corporate holding company.

Income (Loss) from Investment in Affiliates

Income (loss) from investment in affiliates improved to a gain of $2.8 million for the three months ended March 31, 2002 compared to a loss of
$1.9 million for the three months ended March 31, 2001. The results for the three months ended March 31, 2002 are primarily comprised of the Company's equity in AMSG net income of
$2.4 million combined with a gain of $0.4 million on the sale of 1.4 million shares of AMSG stock during the quarter. The results for the three months ended March 31, 2001
include equity in the AMSG net loss for the quarter of $2.3 million, offset by BCBSUW's equity in UWS income of $0.4 million.

Income from Discontinued Operations

Income from discontinued operations of $9.4 million relates to the sale of IRG to APS Healthcare Bethesda, Inc. ("APS") on March 29, 2002
(see Note B). Income from discontinued operations includes the first quarter net loss of IRG of $0.5 million, offset by an after tax realized gain on the sale of $9.9 million.

19

---

Net Income

Consolidated net results improved for the three months ended March 31, 2002 to a net gain of $22.6 million compared to $1.3 million for the
three months ended March 31, 2001. The $22.6 million of income for the three months ended March 31, 2002 was the combination of $11.6 million in operating income from
continuing operations, combined with $2.8 million of income from investment in affiliates and $9.4 million of income from discontinued operations, net of tax, offset by income tax
expense on continuing operations of $1.2 million. The improved operating results primarily reflect improvement in the insured loss ratio, increases in administrative fees on the
self-funded business and the $2.6 million net favorable settlement recorded as a reduction of SGA expenses.

As
of March 31, 2002, Cobalt had federal net operating loss carry-forwards of approximately $114.9 million available to offset future taxable income. A full valuation
allowance has been established
against net deferred tax assets. Cobalt had a current tax expense of $0.2 million and a deferred tax expense of $1.0 million for the three months ended March 31, 2002 on
continuing operations. The Company did not have any income tax expense for the three months ended March 31, 2001.

Liquidity and Capital Resources

Cobalt's sources of cash flow consist primarily of health services revenues and investment income. The primary uses of cash include medical and other benefit
payments, as well as operating expense payments. Positive cash flows are invested pending future payments of medical and other benefits and other operating expenses. Cobalt's investment policies are
designed to maximize yield, preserve principal and provide liquidity to meet anticipated payment obligations.

Cobalt's
operating cash flow improved during the first quarter of 2002 in comparison with the first quarter of 2001. Cash used in continuing operations improved from $21.1 million
for the three months ended March 31, 2001 to $9.9 million for the three months ended March 31, 2002. This reflects improved operating results in the insured medical,
self-funded and government services segments and a reduction of premium and other operating receivables. The primary reason that operating cash flows still remained in an overall negative
position for the first quarter of 2002 despite the improvement in operating results, is due to the run-out of year-end 2001 claim reserves for the HMO membership, which
decreased by 24.4% during the quarter, and the exit from the Medicare+Choice business effective January 1, 2002. Cash provided by investing activities for the three months ended
March 31, 2002 includes proceeds of $18.1 million from the sale of 1.4 million shares of AMSG common stock (see Note F) and $17.0 million in cash proceeds received
from the sale of IRG. Cash provided by investing activities for the three months ended March 31, 2001 reflects the acquisition of UWS, which added $50.0 million to Cobalt's cash and cash
equivalents balance. Cash provided by discontinued operations of $0.5 million for the three months ended March 31, 2002 reflects the first quarter results of IRG.

Due
to periodic cash flow requirements, Cobalt made borrowings under its bank LOC. The LOC is with a commercial bank and has an interest rate equal to the London Interbank Offered Rate
("LIBOR") plus 1.5%, adjusted monthly with interest payments due monthly. The LOC permits aggregate borrowings among certain subsidiaries, excluding the corporate holding company, up to
$20.0 million. Cobalt's outstanding LOC balance was $6.3 million as of March 31, 2002 compared to $7.9 million as of December 31, 2001. The outstanding LOC balance
as of March 31, 2001 was $10.0 million, which was acquired from UWS as a result of the Combination. In addition, the Company has a term business note ("term note") for the corporate
holding company with a commercial bank for $7.5 million originated on December 31, 2001. The term note has an adjustable rate of interest with payment of principal and interest due in
quarterly installments beginning June 30, 2002 and ending June 30, 2003. Interest expense on the credit arrangements discussed above totaled $0.2 million for the three months
ended March 31, 2002. There was no interest expense on debt for the three months ended March 31, 2001.

As
larger controlled affiliate Licensees of the BlueCross BlueShield Association ("BCA"), some of Cobalt's subsidiaries are required to maintain a prescribed liquidity ratio of certain
liquid assets to average monthly expenses, as defined, in accordance with licensure requirements of the BCA. BCBSUW and Compcare Health Services Insurance Corporation ("Compcare") maintained these
required levels as of March 31, 2002.

20

---

Cobalt's
investment portfolio consists primarily of investment-grade bonds and government securities and has a limited exposure to equity securities. At March 31, 2002,
$212.2 million or 98.3% of Cobalt's total investment portfolio was invested in bonds compared with $163.8 million or 94.9% at March 31, 2001. The bond portfolio had an average
quality rating by Moody's Investor Service of "Aa2" at March 31, 2002 and March 31, 2001. At March 31, 2002, $204.8 million or 94.9% of Cobalt's total investment portfolio
was classified as available-for-sale, compared with $162.8 million or 94.2% as of March 31, 2001. The market value of the total investment portfolio, which
includes stocks and bonds, was less than amortized cost by $2.0 million at March 31, 2002 and greater than amortized cost by $0.3 million at March 31, 2001. Unrealized
holding gains and losses on bonds classified as available-for-sale are included as a component of surplus, net of applicable deferred taxes. Cobalt has no investments in
mortgage loans, no non-publicly traded securities (except for investments related to its affiliates), real estate held for investment or financial derivatives (except for
principal-only strips of U.S. Government securities).

Cobalt
has an outstanding LOC in the amount of $15.0 million as of March 31, 2002 available to Health Professionals of Wisconsin, Inc. The balance was
$3.0 million and $4.6 million as of March 31, 2002 and March 31, 2001, respectively. Interest on the LOC is calculated using the prime rate.

Cobalt
has a note receivable from APS for $10.0 million originated on March 29, 2002 related to the sale of IRG. The note bears an interest rate of prime plus 3.5% and has
a term of three years.

Statutory Capital

Cobalt is required to maintain certain levels of statutory capital and surplus under the National Association of Insurance Commissioners ("NAIC") Risk Based
Capital ("RBC") requirements. Wisconsin insurers are also subject to compulsory and security surplus requirements based upon the amount and type of premiums written. In addition to statutory capital
requirements, Cobalt, BCBSUW and Compcare are required to maintain certain levels as determined by the BCA. Cobalt, BCBSUW and Compcare are in compliance with these requirements as of March 31,
2002. In order to satisfy certain intracompany receivables and continue to comply with minimum capital and licensing standards, management has considered selling certain subsidiaries, as well as some
portion or all of its investment in AMSG, or obtaining capital from outside sources.

Included
in the statutory capital of certain insurance subsidiaries of Cobalt are particular interests in, or obligations of, affiliates. United Wisconsin Insurance Company ("UWIC") (a
wholly-owned subsidiary of Compcare) carries as an admitted asset an intracompany secured note from Cobalt in the amount of $22.7 million payable by October 1, 2002. BCBSUW also carries
a $70.0 million secured note obligation from Cobalt payable January 2, 2003.

Management's Plan

Operating losses incurred during 1999 through 2001 reduced the statutory surplus of Cobalt's insurance subsidiaries. Despite these operating losses and the
implementation of changes in statutory accounting ("Codification") effective January 1, 2001, the Company complied with minimum capital and liquidity requirements of the Office of the
Commissioner of Insurance of the State of Wisconsin ("OCI") and the BCA, during 2001, 2000 and 1999. The Company maintained compliance, in part, by contributing regulated and non-regulated
subsidiaries to regulated entities and by collateralizing certain intracompany debt obligations with the common stock of affiliated entities. OCI requested and management submitted a specific plan of
action to continue to exceed the minimum capital requirements of the OCI and the BCA during 2002.

21

---

The
outstanding common stock of Compcare, Unity Health Plans Insurance Corporation ("Unity"), Valley Health Plan, Inc. ("Valley") and United Heartland, Inc. ("UHI") currently provide the
collateral for approximately $92 million borrowed by Cobalt from BCBSUW and UWIC. These intracompany balances have been eliminated in the accompanying consolidated balance sheets. However, the
intracompany balances continue to be an obligation of Cobalt to BCBSUW ($70 million) and UWIC ($22 million) in the statutory-basis financial statements of BCBSUW and UWIC. Cobalt is
obligated to repay BCBSUW by January 2, 2003 and UWIC by October 1, 2002. Transfer of the pledged collateral to BCBSUW and UWIC will satisfy the legal obligations, but would not assist
BCBSUW in complying with minimum capital and liquidity requirements, since the minimum capital calculations for investments in subsidiaries require a greater discount than for cash, marketable
securities or affiliated receivables. However, settlement of these obligations in cash will assist compliance with minimum capital and liquidity requirements.

At
December 31, 2001, all of the Company's subsidiaries are accounted for in the BCBSUW or Compcare capital calculations as a result of contribution or collateralization.

In
order to assure the Company's regulated insurance subsidiaries continue to satisfy minimum capital and liquidity requirements, the OCI requested, management developed and Cobalt's
Board of Directors approved a capital plan at the end of 2001 to improve the Company's position relative to minimum capital and liquidity requirements. The capital plan, which management has provided
to and discussed with the OCI and BCA, included the following action steps to maintain required capital and liquidity levels during 2002:



During
the first quarter of 2002, the Company completed the following elements of its capital plan:



22

---



As
of March 31, 2002, the Company is in compliance with minimum capital and liquidity requirements of the OCI and the BCA, and expects to maintain compliance throughout 2002 by
substantially completing the capital plan described above or transactions with an equivalent impact on the Company's position relative to minimum capital and liquidity requirements.
Non-compliance with
minimum capital and liquidity requirements may subject the Company to various regulatory actions by the OCI and BCA, including rehabilitation, revocation of the Company's license to sell insurance
products in Wisconsin and revocation of the Company's license to operate as a Blue Cross/Blue Shield franchisee.

Inflation

Health care costs have been rising and are expected to continue to rise at a rate that exceeds the consumer price index. The Company's cost control measures,
risk-sharing incentive arrangements with medical care providers, and premium rate increases are designed to reduce the adverse effect of medical cost inflation on its operations. In
addition, the Company utilizes its ability to apply appropriate underwriting criteria in selecting groups and individuals and in controlling the utilization of health care services. However, there can
be no assurance that these efforts will fully offset the impact of inflation or that premium revenue increases will equal or exceed increasing health care costs.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to allowances for doubtful accounts, deferred tax assets, impairment of equity method investments, goodwill impairment, medical and other benefits
payables, and litigation and tax contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

A
discussion of certain accounting policies and estimates deemed by the Company to be critical to an understanding of the Company's financial condition and results of operations is
contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2001.

23

---

Quantitative and Qualitative Disclosures about Market Risk

Because of Cobalt's investment policies, the primary market risks associated with Cobalt's portfolio are interest rate risk, credit risk and the risk related to
fluctuations in equity prices. With respect to interest rate risk, a reasonably near-term rise in interest rates could negatively affect the fair value of Cobalt's bond portfolio. However,
because Cobalt considers it unlikely that Cobalt would need or
choose to substantially liquidate its portfolio, Cobalt believes that such an increase in interest rates would not have a material impact on future earnings or cash flows. In addition, Cobalt is
exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer's credit rating or credit perception may affect the value of
financial instruments.

The
overall goal of the investment portfolio is to support the ongoing operations of Cobalt. Cobalt's philosophy is to manage assets to maximize total return over a
multiple-year time horizon, subject to appropriate levels of risk. Cobalt manages these risks by establishing gain and loss tolerances, targeting asset-class allocations, diversifying
among asset classes and segments within various asset classes, and using performance measurement and reporting.

Cobalt
uses a sensitivity model to assess the interest rate risk of its fixed income investments. The model includes all fixed income securities and incorporates assumptions regarding
the impact of changing interest rates on expected cash flows for certain financial assets with prepayment features, such as callable bonds and mortgage-backed securities. Since last reported as of
December 31, 2001, no significant changes have occurred in the determination of the reduction in fair value of the Company's modeled financial assets as a result of a hypothetical instantaneous
100 basis point increase in market interest rates.

24

---



PART II. OTHER INFORMATION

Cobalt Corporation

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K



| |  | 10.1 |  | Stock Purchase Agreement dated as of March 19, 2002, by and among Cobalt, BCBSUW and AMSG. (Incorporated by reference to Cobalt's Current Report on Form 8-K filed March 26, 2002.)                                                                               
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.2 |  | Purchase and Sale Agreement, effective March 29, 2002, by and among APS Healthcare Bethesda, Inc., CC Holdings LLC, Innovative Resource Group, LLC and Cobalt Corporation. (Incorporated by reference to Cobalt's Current Report
on Form 8-K filed April 2, 2002.)



| |  | (i)  |  | Form 8-K filed on March 26, 2002, reporting the Stock Purchase Agreement dated as of March 19, 2002, by and among Cobalt, BCBSUW and AMSG.                                                    
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (ii) |  | Form 8-K filed on April 2, 2002, reporting the sale of Innovative Resource Group LLC, a wholly owned subsidiary of the Company, to a subsidiary of APS Healthcare, Inc. of Bethesda, Maryland.

25

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|May 15, 2002 | COBALT CORPORATION                                                         
|------------ | ---------------------------------------------------------------------------
|             | By:                                                                        
|             | Gail L. Hanson
Senior Vice President, Treasurer and
Chief Financial Officer

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