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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Period Ended March 31, 2003

Commission File Number 1-14177

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

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

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). Yes ý    No o

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

        41,866,362 shares of common stock were outstanding as of April 30, 2003.

COBALT CORPORATION

INDEX TO
QUARTERLY REPORT ON FORM 10-Q

For the Period Ended March 31, 2003

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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements and Supplementary Data

COBALT CORPORATION

CONSOLIDATED BALANCE SHEETS

See notes to interim consolidated financial statements.

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COBALT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See notes to interim consolidated financial statements.

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COBALT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

(UNAUDITED)

See notes to interim consolidated financial statements

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COBALT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to interim consolidated financial statements.

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COBALT CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note A. Basis of Presentation

        The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 and footnotes thereto included in the Cobalt Corporation ("Cobalt", the "Company", or "we") Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission.

        Certain reclassifications have been made to the interim consolidated financial statements for 2002 to conform with the 2003 presentation.

Note B. Acquisition of Claim Management Services, Inc.

        On December 31, 2002, we purchased all of the outstanding stock of Claim Management Services, Inc. ("CMSI"), a third-party administrator of self-funded employee benefit plans. CMSI is headquartered in Green Bay, Wisconsin and recorded revenue and pre-tax income for the year ended December 31, 2002 of $21,965,000 and $2,316,000, respectively. Our consolidated financial statements include the results of operations for CMSI for periods subsequent to the acquisition date.

        The purchase price consisted of a cash payment of approximately $15.4 million and 149,098 shares of common stock of American Medical Security Group ("AMSG"), plus a possible earn-out of up to $3,000,000 based on CMSI's earnings over the next three years. Any payments made under the earn-out provision will be recorded as additional purchase price. The excess of the purchase price over the book value of net assets acquired was initially recorded as goodwill at December 31, 2002. During the first quarter of 2003, we obtained a third-party appraisal of assets acquired and refined the initial purchase accounting estimates, resulting in goodwill of $8,578,000, identifiable intangible assets of $3,630,000, and an increase in the fair value of tangible assets, which had a fair value of $956,000 at the time of acquisition, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". Goodwill is not amortized and identifiable intangible assets are amortized on a straight-line basis over the estimated lives of the assets from 1-7 years.

Note C. Discontinued Operations

        On March 29, 2002, we sold our behavioral health and medical management subsidiary, Innovative Resource Group, LLC ("IRG"). As a result, IRG is accounted for as a discontinued operation for all periods presented. The agreement required certain subsidiaries of Cobalt to enter into seven-year service agreements for the provision of services by IRG and also provides for certain bonuses/penalties to be received/paid between IRG and Cobalt based on IRG revenues generated from Cobalt in future years.

Note D. Earnings Per Share

        Basic earnings per share ("EPS") is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding, including restricted stock, during the period. The 7,949,904 shares of Cobalt Corporation common stock owned by Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") are not included in the calculation of outstanding shares. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of stock options using the treasury stock method.

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        The calculation of basic and diluted EPS is as follows:

Note E. Stock Based Compensation

        We account for stock option awards under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Under APB No. 25, no stock-based employee compensation cost is reflected in net income to the extent that stock options granted have an exercise price equal to the market value of the underlying common stock on the date of grant and no modifications are made to option terms subsequent to their grant date.

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        The following table illustrates the effect on net income and earnings per share as if we had applied the fair value expense recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended:

Note F. Stock Option and Restricted Stock Awards

        During the three months ended March 31, 2003, we granted to certain eligible executives, employees and non-employee directors stock options to purchase 845,300 shares of Cobalt common stock. The exercise price of these options was equal to the fair value of the stock on the grant date. No compensation expense has been recorded related to these grants.

        During the three months ended March 31, 2003, we also granted 155,900 shares of Cobalt common stock as restricted stock awards to certain eligible executives. The aggregate fair market value of the stock at the grant date was $2.2 million. Twenty-five percent of the shares vest annually on the anniversary date of the grant over the next four years. None of the shares of restricted stock may be transferred or encumbered, except as provided for in the award agreements, until the restrictions on such shares lapse or are removed. For grants of restricted stock, unearned compensation equivalent to the fair market value of the shares at the date of grant is recorded as a separate component of shareholders' equity and subsequently amortized to compensation expense over the vesting period.

Note G. Income from Investment in Affiliates

        Income from investment in affiliates, net of tax for the three months ended March 31, 2002 is primarily comprised of our equity in AMSG net income. We subsequently reduced our ownership in AMSG to 10.7% and reclassified this investment to investments available-for-sale. On January 3, 2003, we sold all of our remaining investment in AMSG.

Note H. Debt

        During 2002, we entered into a three-year revolving credit arrangement ("revolver") with a commercial bank. This revolver provides for borrowings up to $30.0 million by Cobalt with the availability declining to $25.0 million on August 7, 2003 and to $15.0 million on August 7, 2004. The revolver is collateralized by the common stock of BCBSUW and Compcare Health Services Insurance Corporation ("CompcareBlue"). The revolver bears interest at a rate of London Interbank Offered Rate ("LIBOR") plus 1.5% to 2.5% depending on the timing and amount of the borrowings. A

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commitment fee of 3/8% annually is payable quarterly on the unused portion of the revolver. As of March 31, 2003, the outstanding balance on the revolver is $27.8 million and bears interest at a rate of 3.84%.

        Debt covenants under the revolver include compliance with a minimum tangible net worth, minimum debt-service/liquidity ratio, and risk-based capital ("RBC") requirements on a quarterly basis. As of March 31, 2003, we are in compliance with the covenants contained in the revolver.

        We also have a line-of-credit ("LOC") with a commercial bank, which permits aggregate borrowings among certain subsidiaries, excluding the corporate holding company, up to $20.0 million. The LOC has an adjustable interest rate with interest payments due monthly. The LOC bears interest at a rate of LIBOR plus 2.0% or, at our discretion, prime rate. As of March 31, 2003, the outstanding balance on the LOC was $0.8 million.

Note I. Comprehensive Income

        Comprehensive income consists of the following:

Note J. Common Stock

        The common stock of Cobalt has no par or stated value. The authorized, issued and outstanding shares of common stock are as follows:

Note K. Segment Reporting

        We have four reportable business segments: insured medical products, specialty managed care products and services, government services, and self-funded products. Insured medical products include full coverage, copayment, preferred provider organization ("PPO"), Medicare supplement, interim coverage, health maintenance organization ("HMO"), and point-of-service ("POS") products sold primarily in Wisconsin. The specialty managed care products and services segment includes dental, life, disability, and workers' compensation products, along with managed care consulting, electronic claim submission services, subrogation and hospital bill audit services, and receivables management services. The specialty managed care products and services are sold throughout the United States. The self-funded products consist of administrative services and access to Cobalt's extensive provider networks for uninsured contracts and the BlueCard Program. Government services include processing services for Medicare providers throughout the United States and for Medicaid in the states of Wisconsin and Hawaii, as well as providing integrity, consulting, and safeguard services in connection with publicly funded health programs.

        Corporate holding company and other includes activities not directly related to the business segments and unallocated corporate overhead expenses. We evaluate segment performance based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in our December 31, 2002 audited financial statements in the summary of significant accounting policies.

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        Financial data from continuing operations by segment is as follows:

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        Eliminations by operating segment presented above are as follows:

        Assets, other than goodwill and government services assets, have been allocated by segment in the following table based on the percentage of revenue for the three months ended March 31, 2003 and revenues for the year ended December 31, 2002.

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Note L. Commitments and Contingencies

        In 2001, Cobalt issued 31,313,390 shares of newly issued common stock to the Wisconsin United for Health Foundation, Inc. (the "Foundation"). The Foundation was established for the sole purpose of benefiting public health in Wisconsin from the earnings on its investment in Cobalt. During February of 2003, the Foundation sold approximately 6.3 million shares of Cobalt common stock realizing proceeds of approximately $71.9 million. We did not sell any shares of common stock in conjunction with this transaction and we received no proceeds from the sale of the Foundation's shares. As of March 31, 2003, the Foundation owned 59.7% of the total outstanding Cobalt common stock. The Foundation is required to decrease its percentage ownership of Cobalt to 50% by March 23, 2004 and 20% by March 23, 2006. We are responsible for all legal and accounting fees, printing, and other out-of-pocket costs (excluding the Foundation's legal fees) associated with the offerings to facilitate these sales.

        We are involved in various legal actions occurring in the normal course of business. In the opinion of management, adequate provision has been made for any losses that may result from these actions and, accordingly, the outcome of these proceedings is not expected to have a material adverse effect on the consolidated financial statements.

        The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") includes administrative provisions imposing significant requirements relating to maintaining the privacy of medical information ("Privacy"), establishing uniform health care provider and employer identifiers, requiring use of standardized transaction formats ("Transactions"), and seeking protections for confidentiality and security of patient data ("Security"). The Privacy and Transactions provisions require implementation in 2003. Final HIPAA Security rules were published on February 20, 2003, and the implementation and compliance date is April of 2005. HIPAA is far-reaching and complex, and proper interpretation and practice under the law continue to evolve. Consequently, our efforts to measure, monitor, and adjust our business practices to comply with HIPAA are ongoing. Compliance with HIPAA could require us to make significant changes to our operations and failure to comply could subject us to civil and criminal penalties. The costs of complying with HIPAA are likely to be substantial.

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ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Cobalt Corporation ("Cobalt," the "Company," or "we") is the leading managed care company in Wisconsin based on 2001 premium statistics published by the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI"). We offer a broad portfolio of managed care and insurance products to employers, individuals, and government entities. We have an exclusive license to utilize the Blue Cross and Blue Shield service marks in Wisconsin, giving us a unique position in that market. As of March 31, 2003, we serviced 808,933 insured and self-funded members in our medical operations and 499,788 insured and self-funded members in our dental programs.

        Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") provides underwritten products, including preferred provider organizations ("PPO") and indemnity options, as well as self-funded, administrative services only programs. Compcare Health Services Insurance Corporation ("CompcareBlue") operates the oldest health maintenance organization ("HMO") in Wisconsin.

        We offer one of the largest provider networks in Wisconsin. All of our customers, including HMO members, have the ability to access the leading physicians and hospitals in their respective service areas, including Mayo Health Systems, University Health Care, Inc. ("UHC") and Aurora Health Care. We believe that our ability to offer a full spectrum of products and a broad provider network to meet the needs and objectives of a wide range of customers provides us with a competitive advantage.

        We offer a variety of specialty managed care products, including dental, life and disability insurance. We are one of the largest providers of dental HMO and dental indemnity coverage in Wisconsin. We also offer workers' compensation insurance and a variety of specialty managed care services, including cost containment, health care electronic data interchange and receivables management services. These specialty managed care products and services are designed to complement our customers' employee benefit packages. We also process Medicare claims as a Medicare Part A fiscal intermediary and a Regional Home Health intermediary for providers in numerous states and several U.S. territories and as a national intermediary for the Federally Qualified Health Centers in all 50 states.

        We market our medical and dental products through a salaried sales force located throughout Wisconsin, as well as through independent agents and brokers, and directly to customers via the internet. By integrating the marketing of our medical products, we are able to offer a broad range of product choices to health care consumers. We sell our specialty managed care products and services to employer groups and providers, principally in Wisconsin, through a variety of distribution channels.

Capitated and Other Service Arrangements

        CompcareBlue, Valley Health Plan, Inc. ("Valley"), and Unity Health Plans Insurance Corporation ("Unity") utilize capitation and risk-sharing programs with certain physician groups and hospitals to manage the cost of health care provided to members. BCBSUW has not employed capitation or risk sharing arrangements to any significant extent. Capitation is an arrangement whereby we pay medical providers a set fee per member per month in exchange for providing health care services.

        For the three months ended March 31, 2003, medical and other benefits expense included $28.1 million relating to capitated medical and dental arrangements, representing 9.3% of the total medical and other benefits expense, and medical and other benefits payable at March 31, 2003, included $0.9 million relating to capitated arrangements. This compares to the three months ended March 31, 2002, with $32.0 million relating to capitated medical and dental arrangements, representing 10.9% of the total medical and other benefits expense.

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Summary of Membership, Revenue, and Ratios

        The number of "members" is equivalent to the number of persons covered by contracts in force. A covered person may be counted in more than one category. Member equivalents relating to individuals who access medical care under the BlueCard PPO program are not included.

(1)

Consists of intracompany eliminations.

(2)

Represents the medical and other benefits expense for the insured medical products segment as a percentage of health services revenue for that segment.

(3)

Represents selling, general, administrative, and other expenses for the insured medical products segment as a percentage of health services revenue for that segment.

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Comparison of Results of Operations for the three months ended March 31, 2003 with the three months ended March 31, 2002.

        Financial data in this section that relates to specific business segments are gross numbers and, therefore, are not net of intracompany eliminations.

Total Revenues

        Total revenues for the three months ended March 31, 2003 increased 7.2% to $408.6 million compared to $381.0 million for the three months ended March 31, 2002. This increase was primarily due to increased revenues on insured medical products and self-funded products.

Insured Medical Products

        Insured medical products revenue for the three months ended March 31, 2003 increased 5.9% to $323.1 million from $305.1 million for the three months ended March 31, 2002. The increase in premium revenue is primarily due to a premium rate increase on existing business, partially offset by a decline in membership. The number of insured medical members as of March 31, 2003 decreased to 451,049 from 469,784 as of March 31, 2002.

Self-Funded Products

        Self-funded administrative fees for the three months ended March 31, 2003 increased 98.6% to $14.3 million from $7.2 million for the three months ended March 31, 2002. Self-funded medical and dental membership increased to 565,681 as of March 31, 2003 from 170,378 as of March 31, 2002. The large increase in membership is attributable to the acquisition of Claim Management Services, Inc. ("CMSI") on December 31, 2002. The increase in administrative fees is also attributable to the acquisition of CMSI, which accounted for $5.8 million of the increase, and increased volume in the BlueCard PPO program. Under the BlueCard PPO program, we do not maintain membership but receive an administrative fee and percentage of discounts for members from other Blue Cross and Blue Shield plans ("Blue Plans") that access medical care in Wisconsin.

Specialty Managed Care Products and Services

        Specialty managed care products and services revenue for the three months ended March 31, 2003 decreased 2.9% to $44.0 million from $45.3 million for the three months ended March 31, 2002. The decrease in revenue is due to cancellations of life and disability business and lower revenue from the collection business. This decrease was partially offset by an increase in revenues on the workers' compensation business.

Government Services

        Government services revenue for the three months ended March 31, 2003 decreased 3.5% to $27.8 million from $28.8 million for the three months ended March 31, 2002. The decrease is due to lower Medicare reimbursements of approximately $1.7 million offset by new contract revenues of approximately $0.6 million. Medicare reimbursements declined primarily due to lower spending driven by tighter government fiscal policy and implementation of operational efficiencies while two new contracts, one effective in October of 2002 and the other in January of 2003, provided new revenue sources. The contracts added consist of auditing certain hospitals receiving payments for graduate medical education, and performing audit and rate setting activities for the State of Hawaii Medicaid program.

Investment Income

        Net investment income for the three months ended March 31, 2003 increased 57.1% to $4.4 million from $2.8 million for the three months ended March 31, 2002 due primarily to an increase in invested assets resulting from cash proceeds from the sale of American Medical Security Group, Inc. ("AMSG") shares, the sale of Innovative Resource Group, LLC ("IRG"), and positive operating cash flow. Average invested assets for the three months ended March 31, 2003 increased 90.8% to $441.6 million from $231.5 million for the three months ended March 31, 2002. Average annualized

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investment yields, excluding net realized investment gains, investment income from affiliates, and other interest income, were 3.9% for the three months ended March 31, 2003 and 4.8% for the three months ended March 31, 2002.

Expense Ratios

Medical Care Ratio

        The insured medical products care ratio for the three months ended March 31, 2003 was 86.6% compared with 87.9% for the three months ended March 31, 2002. The improvement in the insured medical products care ratio is primarily due to improved underwriting discipline and favorable trends in pharmacy and other costs.

Selling, General, Administrative, and Other Expense Ratio

        For our insurance subsidiaries, the selling, general, administrative, and other ("SGA") expense ratio includes commissions, administrative expenses, premium taxes and other assessments, and claim interest expense. For non-insurance subsidiaries, the SGA expense ratio includes operating expenses only.

        The insured medical products SGA expense ratio for the three months ended March 31, 2003 and for the three months ended March 31, 2002 stayed constant at 10.8%.

        The expense ratio for self-funded products for the three months ended March 31, 2003 improved to 88.4% from 95.2% for the three months ended March 31, 2002. The improved expense ratio results from the acquisition of CMSI, which accounted for 41% of the self-funded revenue in 2003, and an increase in the volume of business serviced under the BlueCard PPO program. Costs associated with servicing the CMSI accounts and the BlueCard PPO program are significantly lower than the costs associated with servicing other self-funded accounts.

        The combined loss and expense ratio for specialty managed care products and services for the three months ended March 31, 2003 improved to 93.1% from 96.7% for the three months ended March 31, 2002. The improvement is primarily due to continued growth in the workers' compensation business, along with favorable claims experience on our dental business.

        The operating expense ratio for government services for the three months ended March 31, 2003 and for the three months ended March 31, 2002 stayed constant at 98.2%.

Income from Investment in Affiliates

        For the three months ended March 31, 2002, income from investment in affiliates, net of tax, of $2.9 million was primarily comprised of our equity in AMSG net income of $2.4 million, combined with a net gain of $0.4 million on the sale of 1.4 million shares of AMSG stock during the first quarter of 2002. Subsequent to the first quarter of 2002, we reclassified our investment in AMSG from an affiliated investment to investments available-for-sale due to our decreased ownership and the fact that we no longer had the ability to exercise significant influence over AMSG.

Income Taxes

        Income tax expense for financial reporting purposes in 2002 was reduced through utilization of certain net operating loss carryforwards that were subject to a valuation allowance that had been established by a charge to income tax expense. The utilization of this benefit resulted in an effective tax rate of 10.2% in the first quarter of 2002. The majority of such net operating loss carryforwards were exhausted for book purposes during the fourth quarter of 2002, and our effective tax rate for financial reporting purposes increased to 38.8% for the three months ended March 31, 2003. For the three months ended March 31, 2003, we recorded current income tax expense of $3.8 million and deferred tax expense of $3.3 million. For the three months ended March 31, 2002, we recorded current tax expense of $0.2 million and deferred tax expense of $1.0 million.

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Discontinued Operations

        Discontinued operations for the three months ended March 31, 2002 consisted of the net operating loss of IRG of approximately $0.6 million and an after-tax gain on the sale of IRG on March 29, 2002 in the amount of $9.9 million.

Net Income

        For the three months ended March 31, 2003, net income was $11.1 million compared to $22.6 million for the three months ended March 31, 2002. For the three months ended March 31, 2002, net income included income from discontinued operations of $9.4 million, referred to above, and $2.9 million in income from affiliates, primarily related to our investment in AMSG. For the three months ended March 31, 2002, net income also benefited from a 10.2% effective tax rate as discussed above. Income from continuing operations before income tax expense and income from investment in affiliates increased from $11.6 million for the three months ended March 31, 2002 to $18.2 million for the three months ended March 31, 2003.

Liquidity and Capital Resources

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

        Our investment portfolio consists primarily of investment-grade bonds and government securities, and has a limited exposure to equity securities. We do not have any investments in mortgage loans or any significant amounts of non-publicly traded securities. The bond portfolio had an average quality rating by Moody's Investor Service of "Aa3" at March 31, 2003 and lower than investment grade bonds represented 5.7% of our total investment portfolio at that date. The market value of the total investment portfolio was greater than amortized cost by $15.9 million at March 31, 2003 and less than amortized cost by $2.0 million at March 31, 2002.

        Our operating cash flow improved for the three months ended March 31, 2003 compared to the three months ended March 31, 2002. Cash provided by continuing operations improved to $33.4 million for the three months ended March 31, 2003 compared to $9.9 million in cash used in continuing operations for the three months ended March 31, 2002. Favorable cash flow for the three months ended March 31, 2003 also reflects increases in advance and unearned premium balances, due to increased premium volume in the health and workers' compensation business and an increase in the medical and other benefits payable balance.

        To meet periodic cash flow requirements, we make borrowings under our bank line-of-credit ("LOC"). The LOC is with a commercial bank and has an interest rate equal to the London Interbank Offered Rate ("LIBOR"), plus 2.0%, adjusted monthly with interest payments due monthly. The LOC permits aggregate borrowings among certain subsidiaries, excluding the corporate holding company, up to $20.0 million. At March 31, 2003, the outstanding balance on this LOC was $0.8 million.

        We also currently have a three-year revolving credit facility ("revolver") from M&I Marshall & Ilsley Bank that originated on August 7, 2002 and provides up to $30.0 million of available credit to us with the availability declining by $5.0 million after one year and an additional $10.0 million after two years. As of March 31, 2003, the interest rate on the revolver was at a rate of LIBOR plus 2.50%. We have pledged the stock of our BCBSUW and CompcareBlue subsidiaries as collateral for the revolver. Our outstanding balance on the revolver was $27.8 million as of March 31, 2003.

        Interest expense on the LOC and revolver discussed above totaled $0.3 million and $0.2 million for the three months ended March 31, 2003 and 2002, respectively.

        The BlueCross BlueShield Association (the "Association") requires BCBSUW and CompcareBlue to maintain a prescribed liquidity ratio of certain liquid assets to average monthly expenses, as defined, in accordance with licensure requirements of the Association. BCBSUW and CompcareBlue maintained these required levels as of March 31, 2003.

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        We have an outstanding line-of-credit in the amount of $15.0 million available to Health Professionals of Wisconsin, Inc., an affiliate of UHC, which is a key provider for Unity. The balance was $3.0 million as of March 31, 2003. Interest is calculated using the quarterly prime rate and is due and payable annually on November 1.

Statutory Capital

        We are required to maintain certain levels of statutory capital and surplus under the National Association of Insurance Commissioners ("NAIC") Risk Based Capital ("RBC") requirements. Wisconsin insurers are also subject to compulsory and security surplus requirements based upon a percentage of underwritten premiums, with the applicable percentage determined by line of business. In addition to statutory capital requirements, we, BCBSUW and CompcareBlue are required to maintain certain capital levels as determined by the Association. As of December 31, 2002, all of our insurance subsidiaries exceeded the minimum capital requirements imposed by the State of Wisconsin and the Association.

Inflation

        Health care costs have been rising and are expected to continue to rise at a rate that exceeds the consumer price index. Our cost control measures, risk-sharing incentive arrangements with medical care providers, and premium rate increases are designed to reduce the adverse effect of medical cost inflation on our operations. In addition, we utilize our ability to apply appropriate underwriting criteria in selecting groups and individuals and in controlling the utilization of health care services. However, we cannot be certain that these efforts will fully offset the impact of inflation or that premium revenue increases will equal or exceed increasing health care costs.

Critical Accounting Policies and Estimates

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

        A discussion of certain accounting policies and estimates deemed by us to be critical to an understanding of our financial condition and results of operations is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Cautionary Statement

        This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements can generally be identified because they are preceded by or include words like "anticipate," "believe," "estimate," "expect," "forecast," "objective," "plan," "possible," "potential," "project" and similar expressions. Forward-looking statements are statements based upon management's expectations at the time such statements are made and are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those contemplated in the statements. Those risks and uncertainties include rising health care costs, business conditions, impact of elimination of memberships, competition in the managed care industry, developments in health care reform and other regulatory issues. Readers are cautioned not to place undue reliance on the forward-looking statements.

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        A discussion of certain risk factors we deem to be critical is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk

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

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

        We use a sensitivity model to assess the interest rate risk of our fixed income investments. The model includes all fixed income securities and incorporates assumptions regarding the impact of changing interest rates on expected cash flows for certain financial assets with prepayment features, such as callable bonds and mortgage-backed securities. The reduction in the fair value of Cobalt's modeled financial assets resulting from a hypothetical instantaneous 100 basis point increase in the U.S. Treasury yield curve is estimated at $15.2 million as of March 31, 2003.

ITEM 4.    Controls and Procedures

        The registrant's certifying officers have evaluated the effectiveness of the design and operation of our internal controls and disclosure controls and procedures within 90 days prior to the date of this quarterly report. Based upon that review, the certifying officers have concluded that the internal controls and disclosure controls and procedures are effectively operating to ensure that material information relating to us and our consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which this quarterly report was being prepared. The review of internal controls and disclosure controls and procedures did not reveal any significant deficiencies in their design or operation, which could adversely affect our ability to record, process, summarize and report financial data. We did not discover any material weaknesses in these controls or procedures, nor did we discover any fraud of any kind involving management or other employees who have a significant role in Cobalt's internal controls. There were no significant changes in the internal controls or in other factors that could significantly affect internal controls subsequent to the date of evaluation, including any corrective actions taken with regard to significant deficiencies or material weaknesses, and there are no corrective actions contemplated as of the date of this report. They did not identify any significant changes that need to be made to ensure the effectiveness of the internal controls or the disclosure controls and procedures. Nor did they identify any other factors that could materially affect the internal controls occurring after the date of our certification.

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PART II.    OTHER INFORMATION

COBALT CORPORATION

Item 1.    Legal Proceedings

        None

Item 2.    Changes in Securities

        None

Item 3.    Defaults Upon Senior Securities

        None

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

        None

Item 5.    Other Information

        None

Item 6.    Exhibits and Reports on Form 8-K

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SIGNATURE

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

22

CERTIFICATIONS

        I, Stephen E. Bablitch, certify that:

        1.     I have reviewed this Quarterly Report on Form 10-Q of Cobalt Corporation;

        2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4.     The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.     The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003

23

CERTIFICATIONS

        I, Gail L. Hanson, certify that:

        1.     I have reviewed this Quarterly Report on Form 10-Q of Cobalt Corporation;

        2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4.     The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.     The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003

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QuickLinks

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
ITEM 4. Controls and Procedures

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K