1. THE ECONOMY AND THE CAPITAL MARKETS University of Connecticut School of Business Robert F. DeLucia March 26, 2004

2. 2 AGENDA  Introduction and Overview  Identifying Critical Economic Forces  Economic Outlook Summary  Broad Capital Market Implications  In-Depth Equity Market Analysis  Equity Market Valuation Factors  Major Systematic Risks to the Forecasts  Individual Stock Selection

3. 3 INTRODUCTION  CIGNA Retirement & Investment Services  Prudential Retirement  Economic Function and Mission  Philosophy and Methodology  Investment vs. Speculation  Emphasis on Economic Fundamentals  Emphasis on Government Economic Policy  Intrinsic Value Foundation

4. 4 PRIMARY ECONOMIC FORCES  Unprecedented Federal Reserve Monetary Stimulus  Pro-Growth / Pro-Investment Tax Policy  Transformation of the U.S. Corporate Sector Balance Sheet, Finances, and Profitability  Declining U.S. Dollar Exchange Rate

5. 5 OTHER SIGNIFICANT ECONOMIC FORCES  Global Central Bank Monetary Stimulus, Particularly in Asia  Rapid Pace of Technological Innovation  Unprecedented Growth in Labor Productivity  Highly Favorable Credit Market Conditions  Globalization and Increasingly Free Markets  Asian Economic Boom Led by Industrialization of China  Schumpeterian Waves of “Creative Destruction”

6. 6 ECONOMIC OUTLOOK: MAJOR CONCLUSIONS  Above-Trend Economic Growth 2004 – 2005  Economic Sector Leadership: Capital Goods, Exports, and Basic Manufacturing  Continued Rising Corporate Profitability  Mild Acceleration in Inflation 2004 – 2005  Global Economic Recovery  Steadily Rising Interest Rates Beginning in Second Half of 2004 and well into 2005

7. 7 CAPITAL MARKET IMPLICATIONS: SUMMARY  Economic Trends and Policy Remain Favorable for Equity Markets  Bear Market for Fixed Income During 2004 – 2005 Period  Further Dollar Depreciation, Primarily Against the Asian Currencies  Within Equity Markets, Most Favorable:  Large Capitalization Stocks  Highest Quality Industry Leaders  Favorable Dividend Prospects  U.S. Multinationals  Non-Dollar Markets and Emerging Asia

8. 8 EQUITY MARKET ANALYSIS: BASIC PRINCIPLES  Corporate Sector Fundamentals  Earnings, Cash Flow, Dividends  Balance Sheets  Corporate Governance  Equity Market Valuation  Quantitative Factors  Qualitative Factors  In Short: Ability of Corporations to Grow Earnings and Dividends, and Market Capitalization Factors

9. 9 EQUITY MARKET VALUATION FACTORS: CAPITALIZATION RATES  Inflation  Interest Rates  Liquidity / Yield Curve / Federal Reserve Policy  Tax Policy  U.S. Dollar  Dividend Pay-Out Ratios  Quality of Reported EPS  Stability of Economic Growth  Geopolitical Developments  Government Economic Policies

10. 10 EQUITY MARKET VALUATION, INTEREST RATES, AND INFLATION Average P/E Ratio Average Annual CPI Market Yield 10-Year Treasury Note 1960 - 1972 17.0 x + 2.8% 5.25% 1973 - 1984 9.5+ 8.09.75 1985 - 199615.5+ 3.57.75 1997 - 200324.0+ 2.35.25 1960 - 2003 Average 16.0 x + 4.3% 7.25% Current Market 18.0 x + 1.7% 3.75%

11. 11 MAJOR RISKS TO THE OUTLOOK  The War on Terrorism  Geopolitical / Middle East Instability  Energy Supply / Costs  Rising Inflation Leads to Premature Monetary Squeeze  U.S. Dollar / Foreign Exchange Crisis  Bond Market Collapse  Trade Protectionism  Boom / Bust Cycle in China

12. 12 SUMMARY AND MAJOR CONCLUSIONS  Prevailing Government Economic Policies and Business Cycle Forces Favorable for Equity Markets  Bonds are in Early Phase of a Multi-Year Bear Market  Further U.S. Dollar Depreciation Likely 2004 – 2005  Equity Market is No Longer Cheap but also Not Statistically Overvalued  Regional and Market Sector Opportunities Exist  Individual Stock Selection More Important Than Ever