SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

 [X] Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 For the fiscal year ended December 31, 1998

                                       OR

 [ ] Transition  Report  Pursuant  to  Section  13  or 15(d) of  the  Securities
     Exchange Act of 1934.

                        Commission file number 001-12617

                             Trigon Healthcare, Inc.
             (Exact name of registrant as specified in its charter)

                  Virginia                                54-1773225
        (State or other jurisdiction of                (I.R.S. Employer
        incorporation or organization)                 Identification No.)


                   2015 Staples Mill Road, Richmond, VA 23230
                    (Address of principal executive offices)

       Registrant's telephone number, including area code (804) 354-7000

 Securities registered pursuant to Section 12(b) of the Act:
       Class A Common Stock, $.01 Par Value            New York Stock Exchange
            (Title of Class)                              (Name of Exchange)

 Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 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. [ X ] Yes [ ] No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 25, 1999 was approximately  $1,448,776,000  (based on the
last  reported  sales price of $34 1/4 per share on March 25,  1999,  on the New
York Stock Exchange).

As of March  25,  1999,  42,300,022  shares of the  registrant's  Class A Common
Stock, par value $.01 per share, were issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Trigon  Healthcare  Inc.'s Annual Report to Shareholders for
the year ended December 31, 1998 into Parts II and IV of this Form 10-K.
Certain  portions of Trigon  Healthcare Inc.'s definitive  Proxy Statement dated
March 29, 1999 for the Annual Meeting of Shareholders into Part III of this Form
10-K.


<PAGE>



                             TRIGON HEALTHCARE, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                                                            Page
                                     PART I
Item 1.  Business......................................................    1
Item 2.  Properties....................................................   14
Item 3.  Legal Proceedings.............................................   15
Item 4.  Submission of Matters to a Vote of Security Holders...........   15

                                     PART II
Item 5.  Market for Registrant's Common Equity and Related Stockholder
         Matters.......................................................   15
Item 6.  Selected Financial Data.......................................   15
Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.....................................   15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....   16
Item 8.  Financial Statements and Supplementary Data...................   16
Item 9.  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure......................................   16

                                    PART III
Item 10. Directors and Executive Officers of the Registrant............   16
Item 11. Executive Compensation........................................   16
Item 12. Security Ownership of Certain Beneficial Owners and Management   16
Item 13. Certain Relationships and Related Transactions................   16

                                     PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
         8-K...........................................................   16

<PAGE>


PART I

Item 1.  Business

DEMUTUALIZATION AND INITIAL PUBLIC OFFERING

Effective  February 5, 1997,  Blue Cross and Blue Shield of Virginia (dba Trigon
Blue Cross Blue Shield) completed its conversion from a mutual insurance company
to a stock  insurance  company  in  accordance  with a Plan  of  Demutualization
("Demutualization"). In accordance with the Demutualization, Blue Cross and Blue
Shield of Virginia changed its name to Trigon Insurance Company (dba Trigon Blue
Cross Blue Shield) ("Trigon  Insurance") and became a wholly owned subsidiary of
Trigon  Healthcare,  Inc.  (Trigon  Healthcare,  Inc.  and  subsidiaries  herein
collectively referred to as "Trigon" or the "Company"). The membership interests
of Blue Cross and Blue Shield of Virginia's eligible members were converted into
Class A common stock of Trigon Healthcare,  Inc., or, in certain  circumstances,
cash.  The  Demutualization  also  required  the  Company to complete an Initial
Public   Offering   ("IPO")  of  stock   simultaneously   with  the  conversion.
Accordingly,  Trigon  Healthcare,  Inc.  issued 17.8  million  shares of Class A
common  stock at $13 per share in the IPO,  generating  net  proceeds  of $215.2
million.  In connection  with the  Demutualization,  the Company was required to
make a payment of $175 million to the  Commonwealth  of Virginia  ("Commonwealth
Payment") in February 1997. The  Commonwealth  Payment was accrued and reflected
as an extraordinary  charge in the consolidated  financial  statements for 1996.
The Company used  approximately  $90 million of the net proceeds and $85 million
in  borrowings  under a revolving  credit  agreement to fund this  payment.  The
Company also used  approximately  $91.1 million of the offering  proceeds to pay
certain  eligible  members  cash in lieu of shares of common  stock  that  would
otherwise   have  been  issued  to  such  eligible   members   pursuant  to  the
Demutualization.

GENERAL

The Company is the largest  managed  health care  company in  Virginia,  serving
nearly 1.9 million members  primarily  through  statewide and regional  provider
networks. The Company's membership represents  approximately 26% of the Virginia
population  and 30% of the Virginia  population  in those areas where Trigon has
the  exclusive  right to use the Blue Cross and Blue  Shield  service  marks and
tradenames.

The  Company  divides  its  business  into  four  segments:   health  insurance,
government  programs,  investments and all other. The Company's health insurance
segment  provides a  comprehensive  spectrum of managed care products  primarily
through three network systems with a range of utilization  and cost  containment
controls.  Within the Company's network product  offerings,  employer groups may
choose various  funding options ranging from fully insured to partially or fully
self-funded financial  arrangements.  While self-funded customers participate in
Trigon's  networks,  the claims are not underwritten by Trigon but are funded by
the  groups.  As of  December  31,  1998,  fully  insured,  also  referred to as
commercial,  products made up 52.5% of total enrollment. Its components include:
three HMO networks which,  with 255,879 members,  are the Company's most tightly
managed and cost efficient networks; the preferred provider organization ("PPO")
networks  which,  with 297,939  members,  offer greater choice of providers than
Trigon's HMO networks;  and the  participating  provider  ("PAR") network which,
with 165,239  members,  is the  Company's  broadest and most  flexible  network.
Commercial products also include Medicare supplement plans with 121,322 members,
the  Medicaid/Medicare  HMO plans with 31,338 members and the Southeast  network
through  Mid-South  Insurance  Company  ("Mid-South"),  a  Fayetteville,   North
Carolina-based  health and life  insurance  company  which was  acquired  by the
Company in 1996, with 105,056 members. Self-funded enrollment as of December 31,
1998 was 666,036 members and represents 35.8% of total  enrollment.  Self-funded
arrangements  are  available  to groups  with more  than 100  employees  and are
typically  utilized by groups  with more than 1,000  employees.  Trigon  charges
self-funded  groups an  administrative  fee based on the  number of members in a
group or the group's claims  experience.  In addition,  most self-funded  groups
purchase  aggregate and/or claim specific stop loss coverage.  In exchange for a
premium,  the group's aggregate  liability is capped for the year or the group's
liability on any one episode of care is capped.

The government  programs  segment  includes the Federal Employee Program ("FEP")
and claims  processing for Medicare.  Through its  participation in the national
contract between the Blue Cross Blue Shield  Association  ("BCBSA") and the U.S.
Office of Personnel  Management ("OPM"), the Company provides health benefits to
federal employees in Virginia.  FEP revenues  represent the reimbursement by OPM
of medical  costs  incurred

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<PAGE>


including the actual cost of administering the program, as well as a performance
based share of the national  program's  overall profit.  As of December 31, 1998
FEP  enrollment   stood  at  213,017  members  and  represents  11.4%  of  total
enrollment.  The FEP is the Company's  largest customer,  representing  18.2% of
total  consolidated  revenues during 1998. The Company processes Medicare Part A
claims for  beneficiaries  in  Virginia  and West  Virginia.  Additionally,  the
Company  provides  computer  processing  capabilities for Medicare Part A claims
processing for certain other Blue Cross Blue Shield plans. As an  administrative
agent for  Medicare,  the Company  allocates  operating  expenses  to  determine
reimbursement  due for  services  rendered  in  accordance  with  the  contract.
Medicare  claims  processed are not included in the  consolidated  statements of
operations and the reimbursement of allocated  operating expenses is recorded as
a reduction of the Company's selling, general and administrative expenses.

All of the investment  portfolios of the  consolidated  subsidiaries are managed
and evaluated  collectively within the investment  segment.  The Company's other
health  related  business,  third party  administration  for medical and workers
compensation,  life and  disability  insurance,  health  promotions  and similar
products are reflected in an "all other" category.

Refer to "Note  23.  Segment  Information"  on pages 55 and 56 of the  Company's
Annual  Report  to  Shareholders,  which  are  incorporated  by  reference,  for
financial information relating to reportable segments.

The following table sets forth the data by network for the last five years:

                          ENROLLMENT BY NETWORK SYSTEM

                                                 As of December 31,
                                    1998      1997      1996      1995      1994
                                ------------------------------------------------
Health Insurance
Commercial
   HMO.........................  255,879   255,548   219,866   166,536    85,739
   PPO.........................  297,939   263,828   230,675   212,322   155,433
   PAR.........................  165,239   192,825   236,383   296,716   334,800
   Medicaid/Medicare HMO.......   31,338    35,488    28,306     6,357         -
   Medicare supplement.........  121,322   125,686   128,015   129,252   131,864
   Non-Virginia (1)............  105,056    64,143    49,251    19,857    26,639
                                ------------------------------------------------
Total commercial...............  976,773   937,518   892,496   831,040   734,475
Self-funded....................  666,036   679,667   700,482   705,459   686,697
Processed for other Blue Cross
and Blue Shield Plans (ASO)....    5,545    15,728    70,330    64,558    65,187
                                ------------------------------------------------
Total health insurance.........1,648,354 1,632,913 1,663,308 1,601,057 1,486,359
Government
Federal Employee Program (PPO).  213,017   207,457   197,241   198,561   195,314
                                ------------------------------------------------
Total .........................1,861,371 1,840,370 1,860,549 1,799,618 1,681,673
                                ================================================

(1) "Non-Virginia"  enrollment  includes Mid-South members beginning in 1996 and
out-of-state student health care coverage (which was discontinued as of December
31, 1995).

SIGNIFICANT CUSTOMERS

Trigon's  two largest  customers  are the FEP and the  Commonwealth  of Virginia
("COV").  FEP  represents  18.2% of total  consolidated  revenues.  The contract
renews  automatically for a term of one year each January 1, unless either party
gives  written  notice at least 60 days prior to the date of renewal.  Under the
program,  a  special  FEP  reserve  is  maintained  at the  national  level as a
protection  against  adverse  claims  trends.  However,  if the contract  should
terminate with a negative balance in the FEP special  reserve,  the losses would
be allocated to participating  plans as  subcontractors  based on a ratio of the
Company's past five year claims  experience as a percent of the total  program's
experience. As of December 31, 1998, the national reserve stood at 4.7 months of
claims and  administrative  payments in reserve,  which is above the target of a
3.0 month reserve base.  Since 1972, the Company has provided health benefits to
employees  and  retirees of COV. The  contract  represents  14.0% of premium and
premium

                                       2

<PAGE>

equivalents.  During 1998,  the COV  exercised  its option to extend the current
contract to June 30, 2000.  The Company  expects the COV to issue a "Request For
Proposal" to administer  health benefits in May 1999. The Company believes it is
well qualified to continue to meet the COV's health care requirements because of
its proven  ability to service the account and its broad offering of PPO and HMO
network products.

NETWORKS

Trigon's  HMO,  PPO and PAR  networks  provide  for the  delivery of health care
services at reduced costs due to favorable network arrangements with health care
providers and by including members in health care decisions. The Company has the
largest  membership  base in Virginia,  which  generally  allows it to negotiate
contracts  with  its  Virginia   providers  that  specify  favorable  rates  and
incorporate  utilization  management  and other cost  controls.  Members  assume
responsibility   for  a  portion  of  health  care  costs  through   copayments,
coinsurance and annual  deductible  contract  provisions.  Members may choose to
receive  health  care  services  from  providers  not part of the  network at an
additional cost to the member. Trigon believes that the copayment,  coinsurance,
annual  deductible  provisions  and out of network  costs enhance its ability to
control  costs by  encouraging  members  to take more  responsibility  for their
health care decisions.

Trigon  established  its first HMO in 1984 and now operates three separate HMOs.
HealthKeepers,  Inc.  ("HealthKeepers")  is a state  qualified HMO that operates
primarily in the central, eastern and southwestern areas of Virginia.  Peninsula
Health Care,  Inc.  ("PHC"),  a joint  venture  owned 51% by Trigon,  is a state
qualified HMO  operating  primarily on the  Peninsula in Eastern  Virginia.  The
Company owns 80% of Priority  Inc.  (acquired  in 1995),  which owns a federally
qualified  HMO,  Priority  Health  Care,  Inc.  ("Priority"),  operating  in the
Tidewater  area in Eastern  Virginia.  As of December 31, 1998, the HMO networks
included   approximately   2,200  primary  care  physicians,   7,200  specialist
physicians and 56 acute care  hospitals  throughout  Virginia.  Members choose a
primary care physician who is responsible for coordinating  health care services
for the  member.  The HMO product  portfolio  is  presented  to  customers  as a
stand-alone HMO offering,  or through "Blue Advantage," a program which includes
HMO and PPO options  administered  and priced as a single  program and which can
only be utilized by groups that contract with Trigon on an exclusive  basis. The
Company's PPO network is a statewide PPO network,  which as of December 31, 1998
included  approximately  16,600  physicians and 88 acute care  hospitals  within
Virginia.  Members may seek care from any PPO  network  physician  depending  on
services  required.  Trigon's  PAR  network  provides  more  traditional  health
coverage  and  included  approximately  17,700  physicians  and  91  acute  care
hospitals. The PAR network offers members more providers to choose from, greater
customization of benefit design and fewer restrictions in the use of non-network
providers than the PPO network. Trigon expects that its PAR network and products
will  continue  to  be  an  important   offering  for  groups  desiring  greater
flexibility and choice in networks and benefits,  as well as a source of new PPO
and HMO members.  Trigon also offers Medicaid and Medicare HMO products. PHC and
Priority  market a Medicaid HMO product to  participants  in the Aid to Families
with Dependent  Children  program and the Aged,  Blind and Disabled  Individuals
programs in the  Peninsula  and  Tidewater  regions of  Virginia.  HealthKeepers
received federal and state  regulatory  approval in the first quarter of 1998 to
begin  selling a  Medicare  HMO  product  within the City of  Richmond  and five
surrounding   counties  in  central  Virginia.   The  product  is  available  to
individuals  who are  eligible for Medicare  either  through age or  disability.
Health care services are provided by a special network  comprised of a subset of
the HealthKeepers  provider  network.  The Company had 1,300 members enrolled in
the Medicare HMO as of December 31, 1998. The Company is being  disciplined  and
cautious  with its entry into the Medicare HMO market and is closely  monitoring
the direction of government rules and regulations.

Trigon's   networks  have  contracts  with   hospitals,   physicians  and  other
professionals  at  reduced  rates  due to the  volume of  business  it offers to
healthcare  providers  that  are  a  part  of  the  network.  Hospital  provider
contracts,  typically three to five years in duration, are generally paid on the
basis of per diems (i.e.,  fixed fee schedules  where the daily rate is based on
the type of service; primary method of in-patient  reimbursement),  per case per
admission  (i.e.,  fixed  fee  schedules  for all  services  during  a  member's
hospitalization),  or a  percentage  of  covered  charges  with  limits  on  the
subsequent year increases. The average rate negotiated with hospitals under this
arrangement  is lower  than the  hospital's  average  standard  retail  charges.
Services  not subject to special per case or per diem payment  arrangements  are
generally paid according to a fee schedule or as a percentage of billed charges.
When  considering  whether to contract with a physician,  the Company conducts a
credentialing  program to  evaluate  the  applicant's  professional  experience,
including licensure.  The Company's HMO network provides reimbursement to almost
all of the primary  care  physicians  in the HMO  network on a capitated  basis.
Specialists  are  reimbursed  based on a fee

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<PAGE>

schedule or, in some cases, on a capitated basis. Some ancillary  services,  lab
services,  behavioral  health and vision services are also  capitated.  Based on
these payment  arrangements,  physicians  and hospitals in the HMO networks have
financial  incentives  to  control  health  care  costs.  PPO and PAR  physician
provider contracts employ fixed fee schedules,  which are below standard billing
rates.  Physician fee schedule  payments are set by the Company using Medicare's
Resource Based Relative Value System  methodologies  and are generally  adjusted
annually.

UTILIZATION MANAGEMENT

Trigon  also  manages  health care costs in its  networks  by using  utilization
management  system  guidelines  for the  networks  that are  intended to address
quality of care and help to ensure that only  appropriate  services are rendered
and that such services are provided in the most  cost-effective  manner.  Trigon
recognizes  that the right care in the right  setting for the right price at the
right time using the right provider  equates to quality medical care. In the HMO
network, the primary care physicians are considered to be the overall manager of
the individual's  health care needs and manage and optimize care through the use
of  referrals  and by approving  all  specialty  care before it is rendered.  In
addition,  the HMO reviews all high cost services  needed by individual  members
that are not  provided by the primary care  physician.  The Company also manages
health care costs and quality by reviewing  monthly cost and utilization  trends
within all networks.  Utilization  rates and cases are reviewed in the aggregate
and by  service  type to  identify  opportunities  for better  cost and  quality
control.  In  addition,  the highest  cost  services are studied to determine if
costs can be reduced by using new, less  expensive  technologies  or by creating
additional  networks or  contracts,  such as networks for  ambulatory  care,  to
reduce  provider  costs.  Trigon  utilizes  Milliman  &  Robertson's  healthcare
management guidelines and requires  pre-admission  approvals of all hospital and
skilled nursing facility stays and concurrent  review of length of stay.  Trigon
prospectively reviews the medical necessity of home health, private duty nursing
and  durable  medical  equipment.  Also,  the  Company  retrospectively  reviews
physician practice  patterns.  Physicians are required to meet certain profiling
criteria that indicate cost effective and quality  practice  standards.  All new
medical  technologies  are reviewed in advance in an attempt to ensure that only
safe and effective new medical procedures are covered. Additionally, the Company
also employs a comprehensive  disease management program.  In this program,  the
Company  identifies  those members  having  certain  chronic  diseases,  such as
asthma, hypertension and diabetes, and proactively works with the member and the
physician to facilitate  appropriate  treatment,  help to ensure compliance with
recommended  therapies and educate members on lifestyle  modifications to manage
the  disease.  The Company  believes  that the program  promotes the delivery of
efficient care and helps to improve the quality of health care delivered.

QUALITY

Trigon's HMO quality improvement  standards are modeled on those of the National
Committee on Quality Assurance ("NCQA"),  an independent,  nonprofit institution
that reviews and accredits  health  maintenance and managed care  organizations.
The quality  improvement  program  instituted by the Company's HMOs provides for
the review of quality of care service and the initial and ongoing  review of the
credentials of all network  providers.  This  credentialing  process  includes a
review of whether the provider has the necessary  licenses,  is qualified in the
specialty   indicated   and  meets   standards   for  safety,   sanitation   and
accessibility.   The  HMO  reviews  the  findings  with  a  quality  improvement
committee,  which  includes  practicing  physicians  from  the HMO  network.  In
addition,  quality of care  services are  monitored  through  profiling and data
analysis,  member satisfaction surveys and problem case review. During 1998, the
Company obtained  three-year full accreditation from the NCQA for HealthKeepers,
its largest HMO. The three-year full  accreditation is granted to companies that
have  excellent  programs for  continuous  quality  improvement  and meet NCQA's
rigorous standards.  Also during 1998, PHC received a one-year accreditation.  A
one-year  accreditation  is provided  to  companies  that have well  established
quality improvement programs and meet most NCQA standards.  The remaining Trigon
HMO plan, Priority, did not seek accreditation in 1998.

The Company has an active program to evaluate the quality and appropriateness of
care provided by its PPO and PAR networks. Provider credentialing, profiling and
member satisfaction,  along with monitoring of outcomes and clinical studies are
all  performed to monitor and manage  quality of care.  Network  physicians  and
other providers  participate in quality management  programs overseen by medical
advisory panels. Using the Company's  computerized medical information database,
these programs involve profiles of the tests,  types of treatment and procedures
performed  for  specific  diagnoses by these  physicians,  as well as reviews of
aggregate  data.  The

                                       4

<PAGE>

American  Accreditation Health Care Commission/URAC has awarded Trigon Insurance
a full,  two-year  accreditation  for health  utilization  management  services.
Trigon Insurance has been certified since 1992.

MARKETING

Trigon  markets its products and services to both  individuals  and groups.  The
individual   products  are  marketed   principally   through  direct   marketing
initiatives and through  brokers.  The group market  includes small,  medium and
large group  employers.  The smaller  group  employers  generally  use insurance
brokers to assist in the  selection  of products and analysis of the actual cost
of competing  plans.  As the group size grows,  employers may use consultants to
assist  them in the  tailoring  of  benefits  and  networks.  The  larger  group
employers  are  generally   more   sophisticated   purchasers,   often  engaging
consultants  to work with the Trigon  sales staff to tailor  benefit and network
design to match their  specific  needs more closely.  In addition,  Trigon has a
direct sales staff that markets the full range of Trigon products and services.

COMPETITION

The health care  industry is highly  competitive  both in Virginia  and in other
states in the southeastern and mid-Atlantic United States into which the Company
principally  intends  to  expand.  Managed  care  companies,   including  large,
well-capitalized  companies which market managed care products nationwide,  have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion and have begun entering Virginia and markets targeted by
Trigon in increasing  numbers.  In some cases, new market  entrants,  as well as
existing health care  companies,  have competed with the Company for business by
offering very favorable  pricing terms to customers.  The Company is facing this
increased competition in the areas in which it is licensed to use the Blue Cross
and Blue Shield service marks and  tradenames,  as well as the areas in which it
operates  without these service  marks and  tradenames.  In areas outside of its
licensed  territory,  the  Company's  ability  to  successfully  compete  may be
adversely  affected  by its  inability  to use the Blue  Cross  and Blue  Shield
service marks and  tradenames,  by the presence of competitors  that are able to
use such service marks and  tradenames in the areas and by the Company's lack of
substantial  market share or established  provider  networks in these areas. The
Company  also faces  competition  from a trend among  health care  providers  to
combine and form their own networks in order to contract  directly with employer
groups and other  prospective  customers to provide health care services.  It is
possible that such overall  increased  competition  will exert strong  pressures
upon Trigon's profitability,  its ability to increase enrollment and its ability
to successfully pursue growth in areas both within and outside of Virginia.

INVESTMENTS

The  Company's  investment  policies are  designed to provide  liquidity to meet
anticipated  payment  obligations  and preserve  capital.  Trigon  fundamentally
believes that  concentrations  of  investments in any one asset class are unwise
due to  constantly  changing  interest  rates  as well as  market  and  economic
conditions.   Accordingly,   the  Company  maintains  a  diversified  investment
portfolio  consisting  both of fixed  income  and  equity  securities,  with the
objective of  producing a  consistently  growing  income  stream and  maximizing
risk-adjusted  total return. The fixed income portfolio includes  government and
corporate securities,  both domestic and international,  with an average quality
rating of A as of December 31, 1998.  The portfolio  had an average  contractual
maturity of 8.4 years as of December  31,  1998.  A portion of the fixed  income
portfolio is designated as a short-term  fixed income  portfolio and is intended
to cover  near-term  cash flow needs and to serve as a buffer for  unanticipated
business needs.  The equity  portfolios  contain readily  marketable  securities
ranging  from  small  growth to  well-established  Fortune  500  companies.  The
international portfolio is diversified by industry, country and currency-related
exposure.  As of December 31, 1998, the Company's equity exposure,  comprised of
direct  equity  as well as  equity-indexed  investments,  was 14.0% of the total
portfolio, as compared to 13.9% as of December 31, 1997 and 27.8% as of December
31, 1996. During 1998, emphasis in the fixed income portion of the portfolio was
on high quality,  long  duration  securities.  Later in the year,  corporate and
tax-exempt municipal bonds were given greater weight.

The  Company  utilizes  internal  and  external  investment  managers.  Both the
internal and external  managers  invest  within  guidelines  established  by the
Company designed to fit into the overall investment  strategy.  These guidelines
establish minimum quality and  diversification  requirements  which, among other
things,  provide limitations on the allowable  investment for a single issuer as
well  as  currency  exposure  for  those  managers  investing  in  international
securities.

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<PAGE>



As of December 31, 1998 the investment  portfolio was comprised of the following
(in thousands):

                                                       ESTIMATED   PERCENT
                                                            FAIR        OF
                                                           VALUE PORTFOLIO
                                                     -----------------------
Fixed income
   Domestic
     U.S. Treasury securities and obligations of
       U.S. government agencies.................   $     514,292    32.3 %
     Mortgage-backed obligations of U.S.                  19,405     1.2
       government agencies......................
     States and political subdivision securities         246,407    15.5
     Other mortgage-backed and asset-backed              122,084     7.7
       securities...............................
     Domestic corporate bonds...................         451,501    28.4
     Short-term debt securities with maturities           83,018     5.2
       of less than one year....................
   Foreign:
     Debt securities issued by foreign
       governments..............................          18,092     1.1
     Foreign corporate bonds....................          25,790     1.6
     Short-term debt securities with maturities
       of less than one year......................            30       -
                                                     -----------------------
Total fixed income.............................        1,480,619    93.0
                                                     -----------------------
Equities
   Domestic.....................................          61,156     3.8
   Foreign......................................          51,106     3.2
                                                     -----------------------
Total equities.................................          112,262     7.0
Derivative instruments.........................              (12)      -
                                                     -----------------------
Total investments..............................    $   1,592,869   100.0 %
                                                     =======================

As of  December  31,  1998,  the  composition  of  the  Company's  fixed  income
investment securities by rating is as follows (in thousands):

                                                       Estimated
                                                            Fair   Percent
                   Rating (1)                              Value  of Total
                                                     -----------------------
AAA............................................    $     890,063    60.1 %
AA.............................................           36,201     2.4
A..............................................           40,722     2.8
BBB............................................          131,425     8.9
BB.............................................          210,538    14.2
B..............................................          169,465    11.4
CCC or lower...................................            2,205     0.2
                                                     -----------------------
Total..........................................    $   1,480,619   100.0 %
                                                    ========================

 (1)  Ratings are assigned by Standard & Poor's Corporation, Moody's Investor
   Service, Inc. or Fitch Investors Service, L.P.

Derivative instruments consist of foreign currency forward contracts and foreign
currency   options.   The  Company  enters  into  foreign  currency   derivative
instruments  to hedge  exposure to  fluctuations  in foreign  currency  exchange
rates.  Company  policy only permits  utilization  of these  instruments  in its
foreign  denominated bond and equity  portfolios.  The  counterparties  to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that a counterparty fails to perform
under a contract and exchange rates have changed unfavorably since the inception
of the contract. The Company anticipates that the counterparties will be able to
fully satisfy their  obligations  under the  agreements.  The forward  contracts
involve the exchange of one currency for another at a future date and  typically
have  maturities of one year or less.  As of December 31, 1998,  the Company had
forward  contracts  outstanding  to purchase  approximately  $600,000 in foreign
currencies  and  to  sell  approximately  $3.1  million  in  foreign  currencies
(primarily  Japanese Yen, British Pound and German Mark (which was redenominated
to the Euro on January 1, 1999)).  The gross unrealized  losses related to these
contracts

                                       6

<PAGE>

as of December 31, 1998 aggregated $12,000. There were no gross unrealized gains
related to these contracts as of December 31, 1998. Foreign currency options are
contracts that give the option purchaser the right,  but not the obligation,  to
buy or sell,  within a specific  period of time,  a  financial  instrument  at a
specified price. These options generally expire within twelve months. There were
no foreign currency options outstanding as of December 31, 1998.

The Company enters into  financial  futures  contracts for portfolio  strategies
such as  minimizing  interest  rate risk and managing  portfolio  duration.  The
notional  amount of the futures  contracts,  $210.9  million as of December  31,
1998, is limited to that of the market value of the underlying portfolios.

Other  than  currently  or  formerly   occupied   Company  property  or  through
mortgage-backed  securities,  the  Company has no  investment  in real estate or
mortgage loans.

INFORMATION SYSTEMS

The Company  develops and maintains  its own  information  systems.  Information
systems  have played and will  continue  to play a key role in ongoing  plans to
continually  improve quality,  lower costs and improve service for the Company's
customers.  Trigon's  centralized,  common database and analytical  technologies
allow for increasingly more sophisticated  methods of managing costs and quality
of care.  The database  includes  comprehensive  information  on  virtually  all
physicians  and  hospitals and one third of the  population  in Virginia,  which
assists  Trigon in analyzing the medical and economic  performance  of providers
and the  medical  and  economic  experience  of  specific  customer  groups  and
individuals. The Company believes that its information systems are a competitive
advantage  and are  sufficient  to meet its current  needs and future  expansion
plans.

The Company uses an integrated set of applications software to support marketing
and underwriting,  eligibility and billing, electronic claims submission, claims
administration,  managed care programs and  corporate  financial  management.  A
combination of custom developed and licensed systems are used to meet the unique
needs of different  products and markets.  An overall  systems  architecture  is
maintained to promote  consistency of data,  processing  rules and  flexibility.
Different  systems  serving  the  unique  products  or  markets  feed  data to a
corporate  information and decision support system. This decision support system
provides a single source of information  for all of the Company's data reporting
and  analytic  needs.  This  includes  operational  and  financial  performance,
underwriting  and  marketing  analysis,  utilization  management  and  actuarial
reporting.

See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness  Disclosure"  included in the Company's Annual
Report  to  Shareholders,  which is  incorporated  herein  by  reference,  for a
comprehensive  discussion  of the Year 2000 issue,  the steps being taken by the
Company to address it and the potential effects on the Company.

REGULATION

HEALTHCARE REFORM - VIRGINIA. In its 1999 Session, the Virginia General Assembly
passed a number  of bills  affecting  health  care,  most of which  will  become
effective  July 1, 1999, if approved by the Governor of Virginia.  At this time,
the Company does not believe that the  legislation  described  below will have a
material effect on the Company's operational results.

o  Comprehensive reforms in managed care health insurance plans, including:  (i)
   an independent external review of adverse utilization review decisions;  (ii)
   a  managed  care  ombudsman  under  the  offices  of  the  State  Corporation
   Commission,  Bureau of Insurance to assist consumers enrolled in managed care
   programs and to gather and report certain data to the General Assembly; (iii)
   a provision  requiring  insurers and HMOs to allow  patients with terminal or
   disabling  conditions to have a "standing referral" to specialists;  (iv) new
   rules  for  allowing  patients  to  access  non-formulary  drugs  in  certain
   circumstances;   and  (v)  24-hour   availability  of  personnel  to  provide
   pre-authorization for proposed medical treatments.

o  Mandates  implementing  coverage for diabetes  management,  minimum  hospital
   stays  for  hysterectomy,  coverage  for  Phase  II,  Phase  III and Phase IV
   clinical  trials  for  treatment  studies on cancer,  mental  health  parity,
   certain pap smears and hospice care.

                                       7

<PAGE>


o  Fair business  practices  standards  applicable  to the claims  reimbursement
   practices of health  insurers and HMOs that  contract  with  providers in the
   establishment of networks.  In general, the standards require carriers to (i)
   pay claims within 40 days of claim  receipt,  unless the claim is not a clean
   claim, is disputed in good faith, or there is otherwise no obligation to pay,
   (ii) contact health care providers within 30 days of receiving claims if they
   desire  further  claim  information  or  documentation,  and (iii)  establish
   reasonable  policies  giving  providers  notice of and  detailed  information
   concerning carriers' required administrative claims processing procedures.

In 1998, the Virginia General  Assembly passed  legislation that transferred the
responsibility  for regulation of utilization  review  activities and quality of
care in  managed  care  plans  from  the  State  Corporation  Commission  to the
Department  of Health.  Full  implementation  of the quality bill does not occur
until  regulations are promulgated by the Department of Health.  Certificates of
quality are not required to maintain a carrier's insurance license until July 1,
2000, so long as an  application  for a certificate is made by December 1, 1999.
There is no indication or expectation that the regulatory process will result in
requirements that will materially  affect the Company's  operations or financial
condition, however, there can be no assurance of that result at this time.

HEALTHCARE REFORM - FEDERAL. Effective January 1, 1998, provisions of the Health
Insurance  Portability and Accountability Act ("HIPAA") affecting the individual
market took effect.  The provisions impose  requirements  concerning  guaranteed
renewability  and  availability,  the  waiving of waiting  periods  for  certain
eligible  individuals coming from group coverage and limitations on the insurers
ability to terminate  policies.  Also, new requirements on group insurance plans
concerning  maternity length of stay and mental health benefits became effective
for group  coverage with the  commencement  of plan years  beginning on or after
January 1, 1998.  There is no expectation  that any of these  requirements  will
materially affect the Company's operations or financial condition.

Also in 1998,  significant  new  federal  regulations  were  proposed  including
regulations to implement the Medicare + Choice provisions of the Balanced Budget
Act of 1997 ("BBA"),  as well as the BBA  provisions  that allow states  greater
flexibility  to bring  managed care  techniques  into the Medicaid  program.  In
addition,  regulations were proposed requiring expedited appeals for ERISA plans
and making other changes to claims processing requirements. Based on comments on
this proposed ERISA regulation from the public and industry, both in the form of
written  comments  and  public  hearings,  changes  to the  proposed  regulation
limiting its scope are anticipated.

In 1999, it is anticipated that federal  legislative  proposals focusing on such
issues as "patient protection," health plan liability, confidentiality of health
information,  Medicare  reform and the  uninsured  will likely be  considered by
Congress. While many of these proposals are viewed by health plans as adverse to
managed care, it is not clear at present whether any of these federal  proposals
will be adopted. Moreover, there can be no assurance that additional legislative
and  regulatory  initiatives  will not be undertaken  in the future,  to address
"patient protection," to engage in structural reform of the health care industry
in order to reduce the  escalation  in health  care costs or to make health care
more  accessible.  Such reform,  if it occurs,  could adversely  affect Trigon's
results of operations or financial condition.

HMO REGULATION.  Trigon has three HMO subsidiaries,  one of which is a federally
qualified HMO. All of Trigon's HMO subsidiaries are licensed by the Commonwealth
of Virginia and are subject to  regulation  and review by the State  Corporation
Commission  and  certain  other  state  authorities,  with  which they must file
periodic  reports.  Among the areas  regulated by Virginia law are policy forms,
market conduct, quality assurance,  covered benefits,  contracts between the HMO
and its health care  providers,  the HMO's  financial  condition,  including net
worth requirements, and the accessibility of providers in the service area of an
HMO.

Trigon's federally qualified HMO is also subject to regulation and review by the
OPM and certain  other federal  authorities,  with which they must file periodic
reports.  Areas covered by federal law are similar to those covered by state law
and  regulation.  In addition,  one of the Company's HMOs offers a Medicare risk
product that subjects that HMO to regulation  and review by the U.S.  Department
of Health and Human Services and certain other federal authorities as well.

INSURANCE HOLDING COMPANY REGULATION.  Trigon Healthcare,  Inc. is not regulated
as an insurance  company but, as the direct or indirect owner of all the capital
stock of Trigon  Insurance,  Trigon Health and Life Insurance  Company  ("Trigon
Health and Life"), a Virginia-based  health and life company, and Mid-South,  is
regulated as an insurance  holding company and subject to the insurance  holding
company acts of Virginia and North

                                       8

<PAGE>

Carolina,  the states in which the insurance company subsidiaries are domiciled.
Effective July 1, 1998,  the Company's  HMOs,  HealthKeepers,  PHC and Priority,
became subject to the obligations and  restrictions  under the Virginia  Holding
Company  Act.  These acts  contain  certain  reporting  requirements  as well as
restrictions on transactions  between an insurer or HMO and its affiliates.  The
Virginia  insurance  holding  company  laws and  regulations  generally  require
insurance  companies  and HMOs within an  insurance  holding  company  system to
register  with the  State  Corporation  Commission  and to file  with the  State
Corporation Commission certain reports describing capital structure,  ownership,
financial  condition,  certain  intercompany  transactions  and general business
operations.  In addition,  various notice and reporting  requirements  generally
apply to transactions  between insurance companies and HMOs and their affiliates
within an insurance holding company system,  depending on the size and nature of
the  transactions.  Virginia  insurance  holding  company  laws and  regulations
require prior regulatory approval or, in certain circumstances, prior notice of,
certain   material   intercompany   transfers  of  assets  as  well  as  certain
transactions between insurance  companies,  HMOs, their parent holding companies
and affiliates.

Additionally,  holding  company  acts  (including  those of  Virginia  and North
Carolina)  restrict the ability of any person to obtain  control of an insurance
company or HMO without prior regulatory  approval.  Without such approval (or an
exemption),  no person may acquire any voting  security of an insurance  holding
company which controls a Virginia insurance company or HMO, or merge with such a
holding company,  if as a result of such transaction such person would "control"
the insurance  holding  company.  "Control" is defined as the direct or indirect
power to direct or cause the  direction  of the  management  and  policies  of a
person and is  presumed  to exist if a person  directly  or  indirectly  owns or
controls 10% or more of the voting securities of another person.

INSURANCE COMPANY REGULATION.  Trigon Insurance, the HMO subsidiaries and Trigon
Health  and Life are  subject  to the  insurance  laws  and  regulations  of the
Commonwealth of Virginia, the domiciliary state of these companies. Mid-South is
domiciled in North  Carolina and is subject to the laws and  regulations of that
state. In addition,  Trigon Insurance,  the HMO subsidiaries,  Trigon Health and
Life and  Mid-South  are subject to the insurance  laws and  regulations  of the
other  jurisdictions  in which they are licensed or  authorized  to do business.
These insurance laws and regulations generally give state regulatory authorities
broad supervisory, regulatory and administrative powers over insurance companies
and insurance  holding companies with respect to most aspects of their insurance
businesses.  This  regulation  is  intended  primarily  for the  benefit  of the
policyholders and members of insurance  companies and not investors.  Regulatory
authorities exercise extensive  supervisory power over health and life insurance
companies with respect to the licensing of insurance companies;  the approval of
forms and  insurance  policies  used;  the  nature of,  and  limitations  on, an
insurance company's  investments;  the periodic examination of the operations of
insurance companies; the form and content of annual statements and other reports
required to be filed on the financial condition of insurance companies;  and the
establishment of capital requirements for insurance companies. Trigon Insurance,
the HMO subsidiaries,  Trigon Health and Life and Mid-South are required to file
periodic statutory  financial  statements in each jurisdiction in which they are
licensed.  Additionally,  Trigon Insurance, the HMO subsidiaries,  Trigon Health
and Life and Mid-South are periodically examined by the insurance departments of
the jurisdictions in which they are licensed to do business.

RISK-BASED  CAPITAL  REQUIREMENTS.  Virginia and North  Carolina have  statutory
risk-based   capital  ("RBC")   requirements  for  health  and  other  insurance
companies. Such requirements are intended to assess the capital adequacy of life
and  health  insurers,  taking  into  account  the  risk  characteristics  of an
insurer's  investments  and  products.  The  formula  for  calculating  such RBC
requirements, set forth in instructions adopted by the NAIC, is designed to take
into  account  asset  risks,  insurance  risks,  interest  rate  risks and other
relevant risks with respect to an individual insurance company's business. Under
these laws,  an  insurance  company must submit a report of its RBC level to the
Virginia  State  Corporation  Commission  or  Insurance  Commissioner  of  North
Carolina, as appropriate, as of the end of the previous calendar year.

The RBC requirements  categorize  insurance companies according to the extent to
which they meet or exceed certain RBC  thresholds.  The law requires  increasing
degrees of regulatory  oversight and intervention as an insurance  company's RBC
declines.  The level of regulatory oversight ranges from requiring the insurance
company  to  inform  and  obtain   approval  from  the   domiciliary   Insurance
Commissioner  of a  comprehensive  financial  plan  for  increasing  its  RBC to
mandatory  regulatory  intervention  requiring an insurance company to be placed
under regulatory control in a rehabilitation or liquidation proceeding.

                                       9
<PAGE>

As of December 31, 1998, the RBC levels of Trigon  Insurance,  Trigon Health and
Life and Mid-South,  as calculated in accordance with the NAIC RBC instructions,
exceeded all RBC thresholds.

The NAIC has  proposed  that  states  adopt RBC  standards  for  HMOs.  To date,
Virginia has not adopted these  standards.  The Company does not expect that RBC
standards  for HMOs if adopted by Virginia  would have a material  effect on the
consolidated financial position of the Company.

RESTRICTIONS ON DIVIDENDS. In the event the Company determines to pay dividends,
the  principal  source  of  funds  to pay  dividends  to  stockholders  would be
dividends  received  by the  Company  from its  subsidiaries,  including  Trigon
Insurance.  Virginia  insurance  laws and  regulations  restrict  the payment of
extraordinary  dividends declared by insurance companies,  including health care
insurers such as Trigon  Insurance,  in a holding company  system.  An insurance
company is prohibited  from paying an  extraordinary  dividend unless it obtains
the approval of the State Corporation  Commission.  An extraordinary dividend is
one which,  together with the amount of dividends and distributions  paid by the
insurance company during the immediately preceding 12 months, exceeds the lesser
of  (i)  10% of the  insurance  company's  surplus  to  policyholders  as of the
preceding December 31 or (ii) the insurance  company's net income (not including
realized capital gains) for the preceding calendar year.  Further,  an insurance
company  may not pay a dividend  unless,  after  such  payment,  its  surplus to
policyholders  is  reasonable  in relation to its  outstanding  liabilities  and
adequate to meet its financial needs. The State Corporation Commission may bring
an action to enjoin or rescind  payment of any  dividend  or  distribution  that
would cause the insurance  company's  statutory  surplus to be  unreasonable  or
inadequate. The maximum amount available after certain dates in 1999 for payment
of dividends by Trigon  Insurance to the Company  without the prior  approval of
the State Corporation Commission is $48.9 million.  During 1998 and 1997, Trigon
Insurance Company received  permission from the State Corporation  Commission to
pay dividends to its parent,  Trigon  Healthcare,  Inc.,  of $227.5  million and
$238.7  million,  respectively.  The 1998 dividend was effected July 1, 1998 and
included  $200.0  million of cash and $27.5  million of stock of a  wholly-owned
subsidiary. The 1997 dividend was effected July 31, 1997 and consisted of $188.7
million of stock of a wholly-owned subsidiary and $50.0 million of cash.

North Carolina,  Mid-South's  domiciliary state, similarly restricts the payment
of dividends by their domiciliary insurance companies.

ASSESSMENTS AGAINST INSURERS.  Under insolvency or guaranty  association laws in
most states,  insurance  companies  can be assessed for amounts paid by guaranty
funds for policyholder  losses incurred by insolvent insurance  companies.  Most
state insolvency or guaranty association laws, including  Virginia's,  currently
provide for assessments  based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable where Mid-South is
licensed even if no premium is received). Substantially all of Trigon's premiums
are currently derived from insurance underwritten in Virginia.

Under the Virginia Life,  Accident and Sickness Insurance  Guaranty  Association
(the  "Association")  Act,  assessments  against insurance companies which issue
policies of accident or sickness insurance,  such as Trigon Insurance,  are made
retrospectively  and are based (up to  prescribed  limits) upon the ratio of (i)
the insurance  company's  premiums  received in Virginia over the previous three
calendar years on accident and sickness insurance,  to (ii) the aggregate amount
of premiums received by all assessed member insurance  companies over such three
calendar  years on  accident  and  sickness  insurance.  The  guaranty  fund and
assessments made under the act are  administered by the  Association,  which has
its own board of directors  selected by member insurers with the approval of the
State  Corporation  Commission.  An assessment  may be abated or deferred by the
Association if, in the opinion of the board,  payment would endanger the ability
of the member to  fulfill  its  contractual  obligations,  but the other  member
insurers may be assessed for the amount of such abatement or deferral.  Any such
assessment paid by a member insurance  company may be offset against its premium
tax  liability to the  Commonwealth  of Virginia in each  succeeding  year in an
amount not to exceed 0.05 (one  twentieth) of one percent of the member's direct
gross  premium  income  for the class of  insurance  for which  the  insurer  is
assessed.  The amount and timing of any future assessments,  however,  cannot be
reasonably  estimated  and are beyond the control of the  Company.  During 1997,
legislation  was enacted in Virginia that changed the methodology by which these
amounts are offset against the premium tax  liability.  Any  assessments  issued
after January 1, 1998 will be offset  against the premium tax liability over the
ten calendar  years  following the year of the payment,  in amounts equal to ten
percent of the amount paid.

                                       10

<PAGE>

VIRGINIA'S OPEN  ENROLLMENT  PROGRAM.  The  Commonwealth of Virginia has an open
enrollment  program  pursuant  to which  Trigon  Insurance  is required to offer
comprehensive  accident and sickness insurance  contracts to individuals without
imposition  of certain  underwriting  criteria  that would deny  coverage on the
basis of medical  condition,  age or  employment  status.  As an  incentive  for
participating  in the open enrollment  program,  Trigon  Insurance pays Virginia
premium tax of  three-fourths  of one percent (0.75%) on premiums  received from
individual  accident and  sickness  insurance  rather than the general  Virginia
premium tax of two and one fourth percent (2.25%). This general Virginia premium
tax applies to  accident  and  sickness  insurance  premiums  received by Trigon
Insurance  from group  business.  Prior to January 1, 1998,  policies  issued to
small  employers were also part of the open  enrollment  program.  Subsequent to
health care reform  legislation in 1997, all carriers  offering  coverage in the
small group  market are  required to issue any policy in its small group  market
portfolio to any small employer that wants to purchase the product.  To withdraw
from the open enrollment program,  Trigon Insurance would be required to give 24
months advance notice of withdrawal to the State Corporation Commission.

BANKRUPTCY AND INSOLVENCY. In the event of a default on any debt incurred by the
Company or the bankruptcy of the Company,  the creditors and stockholders of the
Company would have no right to proceed against the assets of Trigon Insurance or
any other  subsidiary  of the  Company.  If Trigon  Insurance  were subject to a
rehabilitation  or liquidation  proceeding,  such proceeding would be brought by
the State Corporation Commission which would act as the receiver with respect to
such  insurance  company's  property  and  business.  All  creditors  of  Trigon
Insurance,  including,  without  limitation,  members  and, if  applicable,  the
various state guaranty  associations,  would be entitled to payment in full from
such assets before the Company,  as a stockholder,  would be entitled to receive
any distributions therefrom.

THE BLUE CROSS BLUE SHIELD LICENSE

The Company  and certain of its  subsidiaries  have the  exclusive  right to use
certain Blue Cross and Blue Shield service marks and tradenames for all of their
plans  and  products  throughout  Virginia  other  than a small  portion  of the
northern  Virginia suburbs  adjacent to Washington,  D.C. The license requires a
fee to be paid to BCBSA equal to total association expenses allocated to members
based upon enrollment and premium. BCBSA is a national trade association of Blue
Cross and Blue Shield licensees, the primary function of which is to promote and
preserve the  integrity of the Blue Cross and Blue Shield name and service marks
as well as provide certain coordination among plan and provider services.  BCBSA
has 52 primary licensee members, each of which holds exclusive rights to use the
Blue Cross  and/or  Blue Shield  name and  service  mark in specific  geographic
areas, subject to annual licensing fees and certain other guidelines. Each BCBSA
licensee  is an  independent  legal  organization  and  is not  responsible  for
obligations of other BCBSA member organizations. The Company has no right to use
the Blue  Cross and Blue  Shield  service  marks and  tradenames  outside of its
designated territory within the Commonwealth of Virginia.

Under the Company's  license  agreement with BCBSA,  an  institutional  investor
(generally  defined as an entity  identified  in Rule  13d-1(b)  (1) (ii) of the
rules and regulations under the Securities  Exchange Act of 1934 and which makes
certifications required by item 10 of SEC Schedule 13G) may own up to 10% of the
outstanding voting securities of the Company. All other stockholders are subject
to a 5% ownership limitation.  Ownership by any stockholder of voting securities
in excess of such limits would subject the Company to automatic  termination  of
its license.

The Company's  Articles of  Incorporation  contain certain  provisions which are
intended to prevent any holder from acquiring shares in excess of the limits set
forth in the Company's  license  agreement.  However,  there can be no assurance
that a court would enforce these provisions or that if these provisions were not
enforced  that the Company  would  retain the license  from BCBSA.  If the BCBSA
license were to be terminated,  there would be a material  adverse effect on the
Company's  business  and  operations,  which the Company does not believe it can
meaningfully quantify.

The license  agreements between BCBSA and its licensees prohibit a licensee from
entering into certain  transactions  which would result in an unlicensed  entity
obtaining  control of the  licensee or  acquiring a  substantial  portion of the
licensee's  assets  related to  services  provided  under the Blue Cross or Blue
Shield service marks. The license agreements also require that a licensee pay to
BCBSA a specific amount upon  termination of the license  agreement,  subject to
certain limited  exceptions.  The amount payable upon termination of the license
agreement is equal to $25  multiplied  by the number of the  licensee's  members
receiving products or services sold or administered under the

                                       11
<PAGE>


Blue Cross or Blue Shield service marks,  subject to reduction to the extent the
payment of such fee would  cause such  licensee  to fall below  certain  capital
requirements established by the BCBSA.

RATING

Trigon Insurance and HealthKeepers  are each presently  assigned a rating of "A"
(Excellent)  by A.M. Best Company.  Mid-South,  Trigon Health and Life,  PHC and
Priority are each  presently  assigned an A.M. Best rating of "A-"  (Excellent).
A.M.  Best's  ratings of "A" and "A-" are assigned to companies  which have,  on
balance, excellent financial strength,  operating performance and market profile
when compared to the standards  established by the A.M. Best Company.  It is the
opinion of A.M. Best Company that such  companies  have a strong ability to meet
their ongoing  obligations.  Such ratings are not directed to the  protection of
investors and are subject to review and change over time.

EMPLOYEES

As of  December  31,  1998,  the  Company  had 3,740  full-time  employees.  The
employees are primarily  located in Virginia,  with the majority of the Virginia
employees in the cities of Richmond and Roanoke.  Employees  are also located in
Illinois,  Maryland, New Jersey, North Carolina,  Pennsylvania,  South Carolina,
Tennessee,  Washington  D.C. and West  Virginia.  The Company  believes that its
relationship  with its employees is good. No employees are subject to collective
bargaining agreements.

EXECUTIVE OFFICERS

                              Age as of
           Name           December 31, 1998          Position
           ----           -----------------          --------

Norwood H. Davis, Jr.             58       Chairman of the Board and Chief
                                           Executive Officer

Thomas G. Snead, Jr.              45       President and Chief Operating
                                           Officer

John C. Berry                     61       Senior Vice President,
                                           Government and Individual
                                           Business Unit

William P. Bracciodieta, M.D.     53       Senior Vice President and Chief
                                           Medical Officer

Ralph T. Bullock, Jr.             50       Senior Vice President and Chief
                                           Information Officer

Thomas R. Byrd                    41       Senior Vice President and Chief
                                           Financial Officer

James W. Copley, Jr.              46       Senior Vice President and Chief
                                           Investment Officer, Investment
                                           Division, Trigon Services, Inc.

Ellen C. Harrison                 40       Senior Vice President, Health
                                           Maintenance Organization
                                           Operations

Kathy Ashby Merry                 36       Senior Vice President, Member
                                           Services

Ronald M. Nash                    61       Senior Vice President,
                                           Corporate Services

Paul F. Nezi                      51       Senior Vice President,
                                           Marketing and Sales

Timothy P. Nolan                  37       Senior Vice President, Business
                                           Integration

                                       12
<PAGE>

                              Age as of
           Name           December 31, 1998          Position
           ----           -----------------          --------

Thomas A. Payne                   54       Senior Vice President,
                                           Corporate Audit

Peter L. Perkins                  41       Senior Vice President and Chief
                                           Actuary

J. Christopher Wiltshire          44       Senior Vice President, General
                                           Counsel and Corporate Secretary

For a listing of the positions held with the Company by each  executive  officer
and other information, refer to page 58, "Officers," of Trigon Healthcare Inc.'s
Annual Report to Shareholders, which is incorporated herein by reference.

SERVICE MARKS

The Company has registered and maintains  several service marks,  trademarks and
tradenames at the federal level, in the  Commonwealth of Virginia and in certain
other states.  "Trigon,"  "Keycare" and "HealthKeepers" are included among these
marks.  Although the Company considers its registered service marks,  trademarks
and tradenames  important in the operation of its business,  the business of the
Company is not dependent on any individual service mark, trademark or tradename.
For a  discussion  of the  Company's  license to use certain Blue Cross and Blue
Shield service marks and tradenames, see "The Blue Cross Blue Shield License."

FORWARD-LOOKING INFORMATION

The Private  Securities  Litigation  Reform Act of 1995 (the  "Act")  provides a
"safe harbor" for  forward-looking  statements,  so long as those statements are
identified as  forward-looking  and are  accompanied  by  meaningful  cautionary
statements  identifying  important  factors that could cause  actual  results to
differ materially from those discussed in the statement.  The Company desires to
take advantage of these safe harbor provisions. Certain information contained in
this Form 10-K is  forward-looking  within the meaning of the Act or  Securities
and Exchange  Commission  rules.  Words such as expects,  anticipates,  intends,
plans,  believes,  seeks or  estimates,  or variations of such words and similar
expressions  are also  intended to identify  forward-looking  statements.  These
forward-looking   statements  are  subject  to  significant   uncertainties  and
contingencies,  many of which are beyond the control of the  Company.  Set forth
below are certain  important  factors  that,  in  addition  to general  economic
conditions and other factors, some of which are discussed elsewhere in this Form
10-K, may affect these  forward-looking  statements  and the Company's  business
generally.

ESCALATING  HEALTH  CARE  COSTS AND THE  HEALTH  CARE  INDUSTRY.  The  Company's
profitability  depends in large part on accurately  predicting  and  effectively
managing health care costs.  Predicting medical costs is difficult partially due
to the variability of medical inflation.  Trigon continually reviews and adjusts
its premium and benefit  structure to reflect its underlying  claims  experience
and revised actuarial data; however,  several factors could adversely affect the
medical loss ratios.  Certain of these factors,  which include changes in health
care practices, inflation, new technologies,  major epidemics, natural disasters
and  malpractice  litigation,  are beyond any health  plan's  control  and could
adversely  affect the Company's  ability to accurately  predict and  effectively
control health care costs.

Competitive  price pressures in the health  insurance and managed care industry,
which  generally  result from the entry and exit of health care companies in the
marketplace,  historically  have  resulted in, or  contributed  to,  pricing and
profitability  cycles.  The  extent to which  recent  structural  changes in the
managed health care and health insurance industry have altered cyclical patterns
is uncertain.  There can be no assurance,  however,  that a continuation  of the
typical  cyclical  pattern will not adversely  affect the  profitability  of the
Company in the next few years.

COMPETITION. The health care industry is highly competitive both in Virginia and
in other states in the southeastern  and  mid-Atlantic  United States into which
the  Company  principally  intends to  expand.  See  "Competition."  There is no
assurance that the overall increased competition will not exert strong pressures
upon

                                       13
<PAGE>

Trigon's  profitability,  its ability to increase enrollment,  or its ability to
successfully pursue growth in areas both within and outside of Virginia.

GOVERNMENT  REGULATION.  The Company and its subsidiaries are subject to federal
and state regulation. See "Regulation." Regulatory initiatives may be undertaken
in the future,  either at the federal or state  level,  to engage in  structural
reform of the health care  industry in order to reduce the  escalation in health
care costs or to make health care more  accessible.  Such reform,  if it occurs,
could adversely affect Trigon's results of operations or financial condition.

POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS.  As a result of the
expansion of managed care  companies  into  Virginia  and the  southeastern  and
mid-Atlantic  regions of the United States,  the  competition to purchase health
care  companies  has  intensified,  which  in many  instances  has  resulted  in
significant increases in the costs of acquiring such companies,  and which could
affect the availability of attractive  acquisition  opportunities.  In addition,
the Company has no  significant  experience in expanding its managed health care
business  outside  Virginia.  There can be no  assurance  that the Company  will
successfully  identify or complete  acquisitions  or that any  acquisitions,  if
completed,  will perform as expected or will contribute  significant revenues or
profits to the Company.  The Company's ability to expand successfully outside of
Virginia  through  acquisitions  or otherwise  may be adversely  affected by its
inability  to use the Blue Cross and Blue Shield  service  marks and  trademarks
outside of the Company's licensed  territory in Virginia,  by the Company's lack
of substantial market share or established provider networks outside of Virginia
and by the presence of competitors with strong market positions in these areas.

CONCENTRATION  OF BUSINESS IN  VIRGINIA.  While the  Company's  growth  strategy
includes  expansion outside Virginia,  for the foreseeable  future a significant
portion of the Company's revenues may be subject to economic factors specific to
Virginia.  Therefore,  there can be no assurance that a downturn in the Virginia
economy would not adversely affect the Company.

POTENTIAL  LOSS OF BLUE  CROSS AND BLUE  SHIELD  SERVICE  MARKS AND  TRADENAMES.
Trigon and the BCBSA are  parties to a license  agreement  pursuant to which the
Company and certain of its subsidiaries  have the exclusive right to use certain
Blue Cross and Blue  Shield  service  marks and  tradenames  for their  products
throughout  Virginia other than certain  northern  Virginia  suburbs adjacent to
Washington,  D.C. See "The Blue Cross Blue Shield License." If the BCBSA license
were to be terminated, there would be a material adverse effect on the Company's
business and operations,  which the Company does not believe it can meaningfully
quantify.  To the extent  that the Company  continues  to use the Blue Cross and
Blue Shield service marks and tradenames in marketing its managed care products,
there can be no assurance that any negative publicity concerning BCBSA and other
BCBSA licenses will not adversely affect the sales of the Company's managed care
products and the Company's operations.

Item 2.  Properties

The Company is headquartered in Richmond,  Virginia,  where it owns a four-story
building with 265,000 square feet. The Company also owns an office  facility and
warehouse in Roanoke,  Virginia with 201,000 square feet and an office  facility
in  Fayetteville,  North Carolina with 71,000 square feet. The Company leases an
additional 428,000 square feet at various other locations in Richmond, Virginia.
The  Company  also leases  space at two other  facilities  in Roanoke,  Virginia
comprising 52,000 square feet. These properties are primarily used by the health
insurance segment for operations and for corporate administration.

The Company leases 73,000 square feet for regional offices  throughout  Virginia
and 22,000  square  feet for office  space in  Maryland,  North  Carolina,  West
Virginia, Pennsylvania and South Carolina.

Square  footage  utilized  by segment as of  December  31,  1998 was as follows:
health insurance, 896,500; government programs, 60,900; investments,  3,700; and
other reportable  segments,  39,800.  The remaining 111,100 square feet was used
for corporate administration.

                                       14

<PAGE>



Item 3.  Legal Proceedings

The Company is the defendant in one lawsuit that has been filed by a self-funded
employer  group  in  connection  with the  Company's  past  practices  regarding
provider discounts. The suit claims that the Company was obligated to credit the
self-funded  plan  with the  full  amount  of the  discounts  that  the  Company
negotiated with facilities providing health care to members covered by the plan.
The  suit  seeks an audit  and  unspecified  compensatory,  punitive  and  other
damages.  The  Company is also  presently  the  subject of four other  claims by
self-funded  employer  groups related to the Company's past practices  regarding
provider discounts. The Company is communicating with these groups, and lawsuits
have not been filed in  connection  with these  claims.  Although  the  ultimate
outcome of such claims and litigation cannot be estimated,  the Company believes
that the  discount-related  claims and litigation  brought by these  self-funded
employer  groups  will not  have a  material  adverse  effect  on the  financial
condition of the Company.

The Company and certain of its  subsidiaries are involved in various other legal
actions  occurring in the normal  course of their  business.  While the ultimate
outcome of such litigation cannot be predicted with certainty, in the opinion of
Company  management,  after  consultation  with  counsel  responsible  for  such
litigation,  the  outcome of those  actions is not  expected  to have a material
adverse effect on the financial condition of the Company.

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

Not applicable.

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

Refer to page 30, "Market  Prices of Common Stock and Dividend  Data," of Trigon
Healthcare Inc.'s Annual Report to Shareholders, which is incorporated herein by
reference.

Refer  to  "Part  1 -  Business  --  Regulation  --  Insurance  Holding  Company
Regulation"  and "Part 1 - Business -- Regulation --  Restrictions on Dividends"
for  discussion  of  insurance   holding   company   regulations   and  dividend
restrictions.  In  addition,  under  the  terms of the  Company's  $300  million
revolving credit  agreement,  the Company may not pay dividends on the Company's
common stock  unless the  aggregate  of all  dividends  paid by the Company plus
payments to purchase,  redeem or otherwise  acquire capital stock of the Company
(other than the Commonwealth Payment) does not exceed the sum of (i) $10,000,000
plus (ii) 50% of the  consolidated net income (or minus 100% of consolidated net
loss)  of  the   Company  for  the  period   from  the   effectiveness   of  the
Demutualization  through the end of the most recently  completed fiscal quarter,
plus (iii) an amount (not to exceed  $50,000,000) equal to 50% of the cumulative
cash dividends paid out of income of certain  subsidiaries of the Company earned
prior to  January  1, 1997 and  received  by the  Company  after the date of the
revolving credit agreement and before December 31, 1997.

Item 6.  Selected Financial Data

Refer to pages 18 through 19,  "Selected  Consolidated  Financial  and Operating
Data," of Trigon  Healthcare  Inc.'s  Annual Report to  Shareholders,  which are
incorporated herein by reference.

Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations

Refer to pages 20 through 30, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of Trigon  Healthcare Inc.'s Annual Report
to Shareholders, which are incorporated herein by reference.

                                       15

<PAGE>


Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

Refer to pages 29 through 30,  "Quantitative  And Qualitative  Disclosures About
Market Risk,"  included in  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations," of Trigon  Healthcare Inc.'s Annual Report
to Shareholders, which are incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

Refer to pages 31 through 56, the Consolidated  Financial  Statements,  page 57,
"Independent Auditors' Report," and page 17, "Quarterly Financial  Information,"
of  Trigon   Healthcare   Inc.'s  Annual  Report  to  Shareholders,   which  are
incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

Item 10.  Directors and Executive Officers of the Registrant

Refer to pages 1 through 3, "Election of Directors,"  and page 6, "Section 16(a)
Beneficial  Ownership Reporting  Compliance," of the Company's  definitive Proxy
Statement  dated March 29,  1999,  which are  incorporated  herein by  reference
solely as they relate to the Directors of the Company.

Pursuant to General Instruction G(3) to Form 10-K, information as to executive
officers of the Company is set forth in Part I of this Form 10-K.  See "Part 1
- Business -- Executive Officers."

Item 11.  Executive Compensation

Refer to pages 6  through  11,  "Compensation  of  Executive  Officers,"  of the
Company's   definitive   Proxy  Statement  dated  March  29,  1999,   which  are
incorporated herein by reference solely as they relate to this item.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Refer to pages 3 and 4,  "Beneficial  Ownership of Securities," of the Company's
definitive Proxy Statement dated March 29, 1999,  which are incorporated  herein
by reference solely as they relate to this item.

Item 13.  Certain Relationships and Related Transactions

R. Gordon  Smith,  a director of the  Company,  is a partner of McGuire,  Woods,
Battle & Boothe,  LLP, a law firm which serves as counsel to the Company and its
subsidiaries.

PART IV

Item 14. Exhibits,  Financial Statement  Schedules,  and Reports on Form 8-K (a)
 The following documents are filed as part of this report.
      1.    Consolidated  Financial  Statements from Trigon  Healthcare  Inc.'s
            Annual Report to Shareholders  are  incorporated herein by reference
            in Item 8:
        -- Consolidated Balance Sheets as of December 31, 1998 and 1997 (page
           31)
        -- Consolidated Statements of Operations for the years ended December
           31, 1998, 1997 and 1996 (page 32)
        -- Consolidated  Statements of Changes in  Shareholders'  Equity for the
           years ended December 31, 1998, 1997 and 1996 (page 33)
        -- Consolidated  Statements of  Cash Flows for the years ended  December
           31, 1998, 1997 and 1996 (page 34)

                                       16
<PAGE>

        -- Notes to Consolidated  Financial  Statements (pages 35 through 56)
        -- Independent Auditors' Report (page 57)

       2.   Financial statement schedules

      Independent Auditors' Report on Financial
        Statement Schedule ......................(filed herein on page S-1)
      Schedule I - Condensed Financial Information
        of Registrant (parent only) as of December
        31, 1998 and 1997 and for the year ended
        December 31, 1998 and for the period
        February 5, 1997 through
        December 31, 1997 ....................(filed herein on pages S-2 - S-6)

       3. Exhibits. The following is a list of exhibits to this Form 10-K.

Exhibit
Number                  Description

    2    -- Amended and Restated Plan of Demutualization.  (1)
  3.1    -- Amended and Restated Articles of Incorporation of Trigon
              Healthcare, Inc.  (1)
  3.2    -- Amended and Restated Bylaws of Trigon Healthcare, Inc.  (2)
  3.3    -- Articles of Amendment to Amended and Restated Articles of
              Incorporation setting forth the designation, preferences and
              rights of Series A Junior Participating Preferred Stock of Trigon
              Healthcare, Inc. dated July 16, 1997.  (4)
  3.4    -- Amendment to the Amended and Restated Bylaws of Trigon Healthcare,
              Inc.
    4    -- Form of Stock Certificate (other Instruments Defining the Rights
              of Security-Holders).  (1)
  4.1    -- Rights Agreement dated as of July 16, 1997 between Trigon
              Healthcare, Inc. and First Chicago Trust Company of New York, as
              Rights Agent.  (4)
  4.2    -- Form of Rights Certificate.  (4)
 10.1    -- License Agreement by and between the Blue Cross Blue Shield
              Association and the Company.  (2)
                  (a) Blue Cross license
                  (b) Blue Shield license
 10.2    -- Limited Fixed Return Plan for Certain Officers and Directors of
              Trigon Insurance Company.  (1) *
 10.4    -- Non-Contributory Retirement Program for Certain Employees of
              Trigon Insurance Company.  (1) *
 10.5    -- Amended and Restated Supplemental Executive Retirement Program for
              Certain Employees of Trigon Insurance Company dated as of October
              1, 1998.  *
 10.6    -- Salary Deferral Plan for Norwood H. Davis, Jr.  (1) *
 10.7    -- Amended and Restated Employment Agreement dated September 16, 1998
              by and between Trigon Insurance Company and Norwood H. Davis, Jr.
              (7) *
 10.9    -- Amended and Restated Employees' Thrift Plan of Trigon Insurance
              Company dated as of October 1, 1998.  *
10.10    -- Amended and Restated Trigon Insurance Company 401(k) Restoration
              Plan dated as of October 1, 1998.  *
10.12    -- Form of Employment Agreement dated as of December 12, 1990 by and
              between Trigon Insurance Company and John C. Berry and certain
              other executive officers. (1) *
10.14    -- Credit  Agreement  dated as of  February  5, 1997  among  Trigon
              Healthcare, Inc., the banks party thereto and Morgan Guaranty
              Trust Company of New York, as Agent. (2)
10.15    -- 1997 Stock Incentive Plan.  (6) *
10.16    -- Employee Stock Purchase Plan.  (6) *
10.17    -- Non-Employee Directors Stock Incentive Plan.  (6) *
10.18    -- Amendment to the License Agreement by and between the Blue Cross
              Blue Shield Association and the Company.  (5)
10.19    -- Amendment to the Non-Contributory Retirement Program for Certain
              Employees of Trigon Insurance Company.  (3) *
10.20    -- Form of Executive Continuity Agreement dated as of September 16,
              1998 between Trigon Insurance Company and Thomas G. Snead, Jr. and
              certain other executive officers.  (7) *

                                       17

<PAGE>

10.21    -- Form of Executive  Continuity Agreement dated as of September 16,
              1998 between Trigon Insurance  Company and John C. Berry and
              certain other executive officers. (7) *
10.22    -- Amendment to the Non-Contributory  Retirement Program for Certain
              Employees of Trigon Insurance  Company  (now to be known  as) The
              Trigon Insurance Company Retirement Program dated as of October 1,
              1998. *
10.23    -- Clarifying Amendment to the  Non-Contributory  Retirement Program
              for Certain Employees of Trigon Insurance Company (now to be known
              as) The Trigon  Insurance  Company Retirement Program dated as of
              October 1, 1998. *
   11    -- Computation of per share earnings.  Refer to page 51, "Note 15.
              "Net Income and Pro Forma Net Income Per Share," of Trigon
              Healthcare Inc.'s Annual Report to Shareholders, which is
              incorporated herein by reference.
   13    -- Excerpts from the Company's Annual Report to Shareholders for the
              year ended December 31, 1998.
   21    -- Subsidiaries of the Registrant.
 23.1    -- Consent of KPMG LLP.
   27    -- Financial Data Schedule.

(1)Incorporated  by reference to exhibits filed with the Company's  Registration
   Statement on Form S-1 (registration number 333-09773).
(2)Incorporated  by reference to exhibits filed with the Company's Form 10-K for
   the year ended December 31, 1996.
(3)Incorporated  by reference to exhibits filed with the Company's Form 10-K for
   the year ended December 31, 1997.
(4)Incorporated  by reference to exhibits  filed with the  Company's  Form 8-A/A
   filed on July 16, 1997.
(5)Incorporated  by reference to exhibits filed with the Company's Form 10-Q for
   the period ended September 30, 1997.
(6)Incorporated  by  reference  to  exhibits  filed  with  the  Company's  Proxy
   Statement dated March 13, 1997.
(7)Incorporated  by reference to exhibits filed with the Company's Form 10-Q for
   the period ended September 30, 1998.
 * Management contract or compensatory plan or arrangement  required to be filed
   as an exhibit to this Form 10-K pursuant to Item 14(c) of this Form 10-K.

All other  schedules for which  provision is made in the  applicable  accounting
regulation of the Securities and Exchange  Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

                                       18


<PAGE>




                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                   TRIGON HEALTHCARE, INC.
                                         Registrant



                             By:     /s/ THOMAS R. BYRD
                                     ------------------
                                       THOMAS R. BYRD

                             Title:  SENIOR VICE PRESIDENT AND
                                        CHIEF FINANCIAL OFFICER

Date:  March 29, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


        SIGNATURE                     TITLE                            DATE

/s/ NORWOOD H. DAVIS, JR.        Chairman (Principal Executive    March 29, 1999
-------------------------         Officer)
NORWOOD H. DAVIS, JR.


/s/ THOMAS R. BYRD               Senior Vice President and Chief  March 29, 1999
-------------------------         Financial Officer
THOMAS R. BYRD                    (Principal Financial
                                  and Accounting Officer)


/s/ HUNTER B. ANDREWS            Director                         March 25, 1999
-------------------------
HUNTER B. ANDREWS, ESQ.


/s/ LENOX D. BAKER, JR., M.D.    Director                         March 28, 1999
-----------------------------
LENOX D. BAKER, JR., M.D.


/s/ JAMES. K. CANDLER            Director                         March 24, 1999
------------------------------
JAMES K. CANDLER


/s/ ROBERT M. FREEMAN            Director                         March 25, 1999
------------------------------
ROBERT M. FREEMAN


/s/ WILLIAM R. HARVEY            Director                         March 30, 1999
------------------------------
WILLIAM R. HARVEY, Ph.D.


/s/ GARY A. JOBSON               Director                         March 26, 1999
------------------------------
GARY A. JOBSON


<PAGE>



     SIGNATURE                  TITLE                            DATE



/s/ DONALD B. NOLAN              Director                         March 24, 1999
-------------------------------
DONALD B. NOLAN, M.D.


/s/ WILLIAM N. POWELL            Director                         March 26, 1999
-------------------------------
WILLIAM N. POWELL


/s/ J. CARSON QUARLES            Director                         March 24, 1999
-------------------------------
J. CARSON QUARLES


/s/ R. GORDON SMITH              Director                         March 30, 1999
-------------------------------
R. GORDON SMITH, ESQ.


/s/ HUBERT R. STALLARD           Director                         March 25, 1999
-------------------------------
HUBERT R. STALLARD


/s/ JACKIE M. WARD               Director                         March 26, 1999
-------------------------------
JACKIE M. WARD


/s/ STIRLING L. WILLIAMSON, JR.  Director                         March 27, 1999
-------------------------------
STIRLING L. WILLIAMSON, JR.

<PAGE>


                         Independent Auditors' Report on
                          Financial Statement Schedule




The Board of Directors
Trigon Healthcare, Inc.:

Over date of February 16, 1999, we reported on the  consolidated  balance sheets
of Trigon  Healthcare,  Inc. and  subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations,  changes in shareholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,  1998.  In  connection  with  our  audits  of  the  aforementioned
consolidated  financial  statements,  we  also  audited  the  related  financial
statement  schedule  included in this annual report on Form 10-K. This financial
statement  schedule  is the  responsibility  of the  Company's  management.  Our
responsibility  is to express an opinion on this  financial  statement  schedule
based on our audits.

In our opinion,  such financial statement schedule,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects, the information set forth therein.



/s/ KPMG LLP


Richmond, Virginia
February 16, 1999


<PAGE>



                                                                      SCHEDULE I

                   TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
        CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

                                 Balance Sheets
                           December 31, 1998 and 1997
                                 (in thousands)

                                                           1998          1997
                                                    ------------  ------------
ASSETS

Current assets
    Cash                                          $          12             1
    Investment securities, at estimated
      fair value                                        259,514        81,364
    Other receivables                                     3,873         2,569
    Other                                                    29             -
                                                    ------------  ------------

Total current assets                                    263,428        83,934
                                                    ------------  ------------

Investment in subsidiaries                              895,690       960,677
Deferred income taxes                                     1,240             -
Other assets                                                126           166
                                                    ------------  ------------

Total assets                                      $   1,160,484     1,044,777
                                                    ============  ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
    Accounts payable and accrued expenses         $       1,296           562
    Deferred income taxes                                   512           389
    Income taxes payable                                  1,701             -
    Payable for investment securities                       672             -
    Payable to affiliates                                    79            89
                                                    ------------  ------------

Total current liabilities                                 4,260         1,040
                                                    ------------  ------------

Long-term debt                                           85,000        85,000
                                                    ------------  ------------

Total liabilities                                        89,260        86,040
                                                    ------------  ------------

SHAREHOLDERS' EQUITY

    Common stock, $0.01 par, 42,300 shares
      issued and outstanding                                423           423
    Capital in excess of par                            839,187       842,035
    Retained earnings                                   202,554        78,982
    Accumulated other comprehensive income               29,060        37,297
                                                    ------------  ------------

Total shareholders' equity                            1,071,224       958,737

Commitments and contingencies
                                                    ------------  ------------

Total liabilities and shareholders' equity        $   1,160,484     1,044,777
                                                    ============  ============

See accompanying  independent  auditors' report and notes to condensed financial
information.

                                      S-2
<PAGE>



                                                                      SCHEDULE I

                   TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
  CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED

                            Statements of Operations
                    For the year ended December 31, 1998 and
           for the period February 5, 1997 through December 31, 1997
                                 (in thousands)

                                                           1998          1997
                                                    ------------  ------------
REVENUES

    Investment Income                             $      12,590         4,358
    Net realized gains (losses)                             614          (105)
    Cash dividends from subsidiaries                    200,000        50,000
                                                    ------------  ------------

Total revenues                                          213,204        54,253

EXPENSES
    Selling, general and administrative expenses          2,359         1,742
    Interest expense                                      5,291         4,601
                                                    ------------  ------------

Total expenses                                            7,650         6,343
                                                    ------------  ------------

Income before income taxes and equity in
  undistributed net income of subsidiaries              205,554        47,910

Income tax expenses (benefit)                               941          (868)
                                                    ------------  ------------

Income before equity in undistributed net
  income of subsidiaries                                204,613        48,778

Equity in undistributed net income of
  subsidiaries after cash dividends                     (81,041)       30,204
                                                    ------------  ------------

Net income                                        $     123,572        78,982
                                                    ============  ============

See accompanying  independent  auditors' report and notes to condensed financial
information.


                                      S-3
<PAGE>



                                                                      SCHEDULE I

                   TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
  CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED

                Statements of Changes in Shareholders' Equity
                    For the year ended December 31, 1998 and
           for the period February 5, 1997 through December 31, 1997
                                 (in thousands)

<TABLE>
<CAPTION>


                                                               Accumulated
                                          Capital                    Other
                                 Common        in  Retained  Comprehensive
                                  Stock    Excess  Earnings         Income   Total
                                           of Par
                               --------- -----------------------------------------
<S>                            <C>       <C>       <C>        <C>            <C>
Balance at January 1, 1997    $       -         -         -           -         -

Net income after                      -         -    78,982           -    78,982
  Demutualization
Net unrealized gains on
  investment securities, net          -         -         -       3,776     3,776
  of income taxes
                                                                        ----------
Comprehensive income                                                       82,758

Undistributed earnings of
  subsidiaries before                 -         -   722,330      33,521   755,851
  Demutualization and IPO
Issuance of 24,475 shares to
  eligible policyholders in
  the Demutualization and
  cash payments to eligible         245   630,941  (722,330)           -  (91,144)
  policyholders in lieu of
  shares of common stock
Issuance of 17,825 shares in
  the Initial Public                178   215,027         -           -   215,205
  Offering, net of expenses
Purchase and reissuance of
  common stock under employee         -      (144)        -           -      (144)
  benefit plans
Common stock held by
  consolidated grantor trusts         -    (3,789)        -           -    (3,789)
                               --------- -----------------------------------------

Balance at December 31, 1997        423   842,035    78,982      37,297   958,737

Net income                            -         -   123,572           -   123,572
Minimum pension liability
  adjustment, net of income           -         -         -      (1,149)   (1,149)
  taxes
Net unrealized losses on
  investment securities, net          -         -         -      (7,088)   (7,088)
  of income taxes
                                                                        ----------
Comprehensive income                                                      115,335

Adjustment to cash payments
  to eligible policyholders
  in lieu of shares of common         -      (690)        -           -      (690)
  stock in the Demutualization
Purchase and reissuance of
  common stock under
      Employee benefit plans          -      (344)        -           -      (344)
      Stock option plans, net
    of income taxes of $525           -      (963)        -           -      (963)
Common stock held by
  consolidated grantor trusts         -      (851)        -           -      (851)
                               --------- -----------------------------------------

Balance at December 31, 1998  $     423   839,187   202,554      29,060 1,071,224
                               ========= =========================================
</TABLE>

See accompanying  independent  auditors' report and notes to condensed financial
information.


                                      S-4
<PAGE>



                                                                      SCHEDULE I

                   TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
  CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY), CONTINUED

                            Statements of Cash Flows
                    For the year ended December 31, 1998 and
           for the period February 5, 1997 through December 31, 1997
                                 (in thousands)

                                                          1998          1997
                                                   ------------  ------------

Net income                                       $     123,572        78,982
Adjustments to reconcile net income to net
    cash provided by (used in) operating
    activities
     Accretion of discounts and amortization
       of premiums, net                                   (845)         (129)
     Undistributed earnings of subsidiaries             81,041       (30,204)
     Increase in other receivables                      (1,254)       (2,569)
     (Increase) decrease in other assets                    11          (166)
     Increase in accounts payable and accrued
       expenses                                            734           562
     Increase in income taxes payable                    1,701             -
     Change in deferred income taxes                    (1,293)           53
     Increase (decrease) in obligation for
       Commonwealth Payment                                  -      (175,000)
     Increase (decrease) in payable to
       affiliates                                          (10)           89
     Realized investment (gains) losses, net              (614)          105
                                                   ------------  ------------

 Net cash provided by (used in) operating
    activities                                         203,043      (128,277)
                                                   ------------  ------------

Cash flows from investing activities
     Investment securities purchased                  (492,562)     (214,562)
     Proceeds from investment securities sold          227,515        77,002
     Maturities of fixed income securities              89,481        57,180
     Investment in subsidiary                          (25,000)            -
                                                   ------------  ------------

Net cash used by investing activities                 (200,566)      (80,380)
                                                   ------------  ------------

Cash flows from financing activities
     Proceeds from long-term debt                            -        85,000
     Payments to members in lieu of common
       stock pursuant to Plan of Demutualization          (690)      (91,144)
     Net proceeds from issuance of common stock              -       215,205
     Purchase and reissuance of common stock
       under employee benefit and stock option
       plans                                            (1,307)         (144)
     Common stock purchased by grantor trusts             (469)         (259)
                                                   ------------  ------------

Net cash provided by (used in) financing
    activities                                          (2,466)      208,658
                                                   ------------  ------------

Increase in cash                                            11             1
Cash - beginning of year                                     1             -
                                                   ------------  ------------
Cash - end of year                               $          12             1
                                                   ============  ============

Cash paid during the year for
     Interest                                    $       5,006         4,344
                                                   ============  ============
     Income taxes                                          525             -
                                                   ============  ============

See accompanying  independent  auditors' report and notes to condensed financial
information.

                                      S-5

<PAGE>



                                                                      SCHEDULE I

                   TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT ONLY), CONTINUED

     Notes to Condensed Financial Information of Registrant (Parent Only)


The condensed financial  information provided should be read in conjunction with
the Consolidated Financial Statements of Trigon Healthcare,  Inc. ("Registrant")
incorporated  by  reference  in Part II,  Section  8 of this  Form  10-K and the
following notes:

(a) Basis of Presentation

    The  accompanying  condensed  financial  information  reflects the financial
    position  as of December  31,  1998 and 1997 and the results of  operations,
    changes in  shareholders'  equity and cash flows for the year ended December
    31, 1998 and for the period  after the  Demutualization  and Initial  Public
    Offering,  February 5, 1997 through December 31, 1997. The Registrant had no
    operations  prior to  February  5,  1997,  the date it  became  the  holding
    company.  Refer to note 2 to the  consolidated  financial  statements of the
    Registrant  for details  regarding the  Demutualization  and Initial  Public
    Offering.

    Certain prior year amounts have been  reclassified to conform to the current
    year presentation.

(b) Long-Term Debt

      The information  about long-term debt contained in note 12 of the notes to
      the  consolidated  financial  statements of the Registrant is incorporated
      herein by reference.

(c) Cash and Stock Dividends

      During 1998 and 1997, a subsidiary  of the  Registrant,  Trigon  Insurance
      Company,  received permission from the Virginia Bureau of Insurance to pay
      dividends  to  the  Registrant  of  $227.5  million  and  $238.7  million,
      respectively.  The 1998  dividend was  effected  July 1, 1998 and included
      $200.0  million  of cash and  $27.5  million  of  stock of a wholly  owned
      subsidiary.  The 1997 dividend was effected July 31, 1997 and consisted of
      $50.0  million  in cash and  $188.7  million  in  stock of a wholly  owned
      subsidiary.

(d)   Investment in Subsidiary

      The Registrant made a $25,000,000 capital  contribution to its subsidiary,
      Monticello Service Agency,  Inc. (MSA) during 1998. MSA immediately made a
      $25,000,000 capital contribution to its subsidiary, Trigon Health and Life
      Insurance Company.


(e)   Comprehensive Income

      The information  about  comprehensive  income  contained in note 16 of the
      notes  to the  consolidated  financial  statements  of the  Registrant  is
      incorporated herein by reference.

                                      S-6
<PAGE>



EXHIBIT INDEX


Exhibit
Number                  Description

  3.4    -- Amendment to the Amended and Restated Bylaws of Trigon
              Healthcare, Inc.

 10.5    -- Amended and Restated Supplemental Executive Retirement Program for
              Certain Employees of Trigon Insurance Company dated as of
              October 1, 1998.

 10.9    -- Amended and Restated  Employees'  Thrift Plan of Trigon Insurance
              Company dated as of October 1, 1998.

 10.10   -- Amended and Restated Trigon Insurance Company 401(k)  Restoration
              Plan dated as of October 1, 1998.

 10.22   -- Amendment to the Non-Contributory  Retirement Program for Certain
              Employees of Trigon  Insurance  Company  (now to be known  as) The
              Trigon Insurance Company  Retirement  Program dated as of October
              1, 1998.

 10.23   -- Clarifying Amendment to the  Non-Contributory  Retirement Program
              for Certain Employees of Trigon Insurance Company (now to be known
              as) The Trigon Insurance Company  Retirement  Program  dated as of
              October 1, 1998.

   13    -- Excerpts from the Company's Annual Report to Shareholders for the
              year ended December 31, 1998.

   21    -- Subsidiaries of the Registrant.

 23.1    -- Consent of KPMG LLP.

   27    -- Financial Data Schedule.