**SUPPLEMENTAL RETIREMENTAGREEMENT**

 

             ThisSupplemental Retirement Agreement dated as of _______________, 2001, betweenCobalt Corporation (the “Company”) and Thomas R. Hefty (“Hefty”).

 

**RECITALS**
| a.     | Hefty  has served as Chairman, President and Chief Executive Officer of the Company  or its predecessor for 16 years, during which time Hefty has contributed  significantly to the growth and welfare of the Company’s predecessor and the  Company.                                                                                                                                                                                                                                                                                                       |
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| b.     | When  Hefty became President of Blue Cross & Blue Shield United of Wisconsin, a  wholly owned subsidiary of the Company (“BCBSUW”), and the Company’s  predecessor, they were experiencing severe financial difficulties, and Hefty  was primarily responsible for restoring them to financial solvency.                                                                                                                                                                                                                                      |
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| c.     | Hefty  was primarily responsible for the creation by the Company’s predecessor of  the joint venture between American Medical Security, Inc. (“AMS”) and the  Company’s predecessor, which resulted in the Company’s predecessor acquiring  100% of the outstanding common stock of AMS and the subsequent separation of  AMS and the Company through a spinoff (“Spinoff”) to shareholders.  As a result of the Spinoff, BCBSUW now  holds approximately 44 percent of the issued and outstanding Common Stock of  AMS. |
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| d.     | Hefty  led the conversion of BCBSUW from a service insurance corporation to a stock  insurance corporation and subsequent combination with the Company, which,  among other things,  resulted in the  creation of the Wisconsin United For Health Foundation, Inc. (the  “Foundation”) and the issuance of 31.3 million shares of the newly issued  stock of the Company to the Foundation to be used to fund public health  initiatives for the State of Wisconsin.                                                                              |
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| e.     | As  a result of these achievements, the Company desires to supplement the  retirement benefits Hefty will receive from the Company’s benefit plans.                                                                                                                                                                                                                                                                                                                                                                                                         |

 

**AGREEMENT**

             NOW,THEREFORE, the Company and Hefty agree as follows:
             1.          Supplemental Retirement Payment.
(a)Payment.  Upon the earlier of Hefty's (i)  Retirement, (ii) death, (iii)Disability (iv) termination of employment by the  Company for any reason other than for Cause or (v) termination of employment  for Good Reason (collectively, a "Termination"), Hefty (or his  designed beneficiary or estate, as the case may be) shall receive a single,  lump sum supplemental retirement payment of one million dollars ($1,000,000)  within 30 days of Hefty’s Termination (or at such later date provided in  Section 2 of this Agreement).  (b)Definition  of Cause, Good Reason, Disability and Retirement  For purposes   of this Agreement “Cause”, “Good Reason” and “Disability” shall  be defined as such terms are defined in the Executive Severance Agreement  between Hefty and the Company dated June _____, 2001.  Retirement shall mean termination of  employment by Hefty after he has attained age 55.
 
2.Deferral  of Payments.  To the extent any payment made to Hefty  hereunder would be nondeductible to the Company pursuant to Section 162(m) of  the Internal Revenue Code of 1986, as amended (the “Code”), Hefty agrees that  such payment shall be deferred until Hefty ceases to be a “covered employee”  under Section 162(m) of the Code.  Any  amounts deferred shall be held in a rabbi trust and shall be credited with  interest at the prime rate of interest as quoted by M&I Marshall &  Ilsley Bank.
             3.          Successors and Assignment.
(a)Successors  to the Company.  The Company will require any successor  (whether direct or indirect, by purchase, merger, consolidation or otherwise)  of all or substantially all of the business and/or assets of the Company or  of any division or subsidiary thereof to expressly assume and agree to  perform the Company’s obligations under this Agreement in the same manner and  to the same extent that the Company would be required to perform them if no  such succession had taken place.  (b)Assignment  by Hefty.  This Agreement shall inure to the benefit  of and be enforceable by Hefty’s personal or legal representatives,  executors, administrators, successors, heirs, distributees, devisees and  legatees.
             4.          Miscellaneous.
(a)Withholding  of Taxes.  The Company shall be entitled to withhold  from any amounts payable under this Agreement all taxes as shall be legally  required (including, without limitation, any federal, state or local income  or employment taxes).  (b)Severability.  In the event any provision of this  Agreement shall be held illegal or invalid for any reason, the illegality or  invalidity shall not affect the remaining parts of the Agreement, and the  Agreement shall be construed and enforced as if the illegal or invalid  provision had not been included.   Further, the captions of this Agreement are not part of the provisions  hereof and shall have no force and effect.  (c)Modification.  No provision of this Agreement may be  modified, waived or discharged unless such modification, waiver or discharge  is agreed to in writing and signed by Hefty and by the Company.  (d)Applicable  Law.  To the extent not preempted by the laws of  the United States, the laws of the state of Wisconsin shall be controlling  law in all matters relating to this Agreement.
 

             INWITNESS WHEREOF, the parties have executed this Agreement on this ____ day of__________, 2001.

 

COBALT CORPORATION

 
By:  Thomas  R. Hefty     James  L. Forbes Chairperson,  Management Review Committee     Stephen  E. Bablitch Senior  Vice President, General Counsel and Secretary