United States Patent [19J
`Koppes et al.
`
`[54] SYSTEM FOR MANAGING A STABLE
`VALUE PROTECTED INVESTMENT PLAN
`
`[75]
`
`Inventors: Seth C. Koppes; Edward J. Lanigan;
`William A. Meier, all of St. Louis;
`Richard M. Hurwitz, Wildwood; Chris
`J. Garlich, Ballwin; Mark A. Gilje,
`Crystal Lake Park; Scott L. Fargo,
`Brentwood, all of Mo.
`
`[73] Assignee: Bancorp Services, Inc., St. Louis, Mo.
`
`[21] Appl. No.: 09/157,096
`
`[22] Filed:
`
`Sep. 18, 1998
`
`Related U.S. Application Data
`
`[63] Continuation of application No. 08/709,882, Sep. 9, 1996.
`Int. Cl.6
`...................................................... G06F 17/00
`[51]
`[52] U.S. Cl. ................................................... 705/4; 705/35
`[58] Field of Search ..................................... 705/4, 35, 36
`
`[56]
`
`References Cited
`
`U.S. PATENT DOCUMENTS
`
`4,566,066
`4,642,768
`4,648,037
`4,674,044
`4,722,055
`4,750,121
`4,752,877
`4,774,663
`4,839,804
`
`1!1986 Towers.
`2/1987 Roberts.
`3/1987 Valentino.
`6/1987 Kalmus eta!..
`1!1988 Roberts.
`6/1988 Halley eta!..
`6/1988 Roberts et a!. .
`9/1988 Musmanno et a!. .
`6/1989 Roberts et a!. .
`
`111111
`
`1111111111111111111111111111111111111111111111111111111111111
`US005926792A
`[11] Patent Number:
`[45] Date of Patent:
`
`5,926,792
`Jul. 20, 1999
`
`6/1990 Durbin eta!..
`4,933,842
`7/1990 Linstroth et a!. .
`4,942,616
`4,969,094 11/1990 Halley eta!. .
`5,101,353
`3/1992 Lupien eta!..
`5,126,936
`6/1992 Champion et a!. .
`5,193,056
`3/1993 Boes.
`5/1993 Wolfberg et a!. .
`5,214,579
`5,262,942 11/1993 Earle .
`5,291,398
`3/1994 Hagan.
`5/1995 Kolton eta!. .
`5,414,838
`5/1998 Sexton eta!. .
`5,752,236
`5,806,042
`9/1998 Kelly eta!. .
`5,819,230 10/1998 Christie et a!. ............................. 705/4
`
`Primary Examiner-Thomas R. Peeso
`Attorney, Agent, or Firm-Obion, Spivak, McClelland,
`Maier & Neustadt, P.C.
`
`[57]
`
`ABSTRACT
`
`Method and system to track, reconcile and administer the
`values of life insurance policies in separate accounts, includ(cid:173)
`ing Stable Value Protected funds. Accordingly, targeted
`returns are translated into unit values on a daily basis for
`each fund. Additionally the system tracks restrictions (e.g.,
`timing, amount of withdrawal and amount of reallocations)
`on a premium-by-premium basis, and tracks the book value,
`market value, duration and targeted return on a client-by(cid:173)
`client basis. The system calculates and tracks the payments
`and credits applicable to a withdrawal or reallocation
`request, in addition to the liquidation schedules for each
`fund based on the payment amounts and credits of specific
`funds. Additionally, daily unit values are calculated given a
`periodic targeted return (i.e., a quarterly targeted return).
`
`37 Claims, 15 Drawing Sheets
`
`SEliC! AS A PRESENT ASSET GROUP ONE OF THE
`ASSET GROUPS WHICH
`IS USED TO COVER PlAN
`SPCNSORED FUND UABiunES
`
`CONTACT ASSET MANAGER TO DETERMINE TiiE PRESENT
`CASH VALUE OF EACH lYPE OF ASSET (i.e., STOCK,
`MUTUAL FUND, INSURANCE POUCY) HEUO BY THE PlAN
`SPCNSOR FOR mE CURRENT ASSET GROUP
`
`READ FROM THE DATABASE mE NUMBER OF EACH lYPE OF
`INVESTMENT ASSOC~TED WITH TiiE CURRENT ASSET GROUP
`
`MULTIPLY THE NUMBER OF UNITS FOR EACH l'II'E
`OF INVESTMENT BY THE DETERMINED CASH VALUE
`
`STORE THE RESULT OF mE MULTIPUCATION IN THE
`DATABASE AS THE PRESENT ASSET VALUE FOR THE
`CURRENT ASSET GROUP
`
`60
`
`61
`
`64
`
`66
`
`68
`
`END
`
`Ex. 1016 - 1/26
`
`

`

`U.S. Patent
`US. Patent
`
`Jul. 20, 1999
`Jul. 20, 1999
`
`Sheet 1 of 15
`Sheet 1 0f 15
`
`5,926,792
`5,926,792
`
`20
`
`18
`
`3 #9S:
`
`
`2
`
`---~12
`4,AJI/,,
`(----)
`...
`I -r
`1---- I
`I
`r-- I 13
`--1
`.---
`r.:--(cid:173)
`::=:::::~
`
`F'IC. 1
`FIG. 7
`
`Ex. 1016 - 2/26
`
`Ex. 1016 - 2/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 2 of 15
`
`5,926,792
`
`START
`
`CALL CLEARING HOUSE/MONEY MANAGER AND DOWNLOAD
`NET ASSET VALUES FOR ALL HYPOTHETICAL FUNDS
`
`--30
`
`UPDATE THE LIABILilY SIDE OF THE DATABASE
`
`,--31
`
`SETTLE NEW INSTRUCTIONS WITH CLEARING
`HOUSE/MONEY MANAGER
`
`v-32
`
`CALCULATE NEW BALANCES FOR ALL PARTICIPANTS BASED ON NEW
`UNIT VALUES FOR ASSETS & UPDATE VR WITH NEW BALANCES
`
`--33
`
`CALL THE ASSET MANAGER AND DOWNLOAD NET ASSET VALUES FOR
`ALL ASSET FUNDS, CONFIRM PREVIOUS DAYS TRADES AND CALCULATE --34
`NUMBER OF UNITS PER ASSET FUND AND THEIR CASH VALUE
`
`RECEIVE ADDITIONAL ASSET DATA AND RECONCILE
`ALL CHARGES INTERNALLY
`
`~35
`
`UPDATE THE ASSET SIDE OF THE DATABASE
`
`v--36
`
`40
`
`y
`
`ANY
`ASSET ALLOCATION
`OUTSIDE OF PRESET
`LIMITS?
`
`F 'IC.2A
`
`N
`
`A
`
`NOTIFY PLAN
`SPONSOR ABOUT 1---42
`ASSET LEVELS
`I
`
`Ex. 1016 - 3/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 3 of 15
`
`5,926,792
`
`v- 43
`
`GENERATE DAILY PAYMENT INSTRUCTIONS
`I
`FAX CONFIRMATION OF TRADES TO PARTICIPANTS AND SPONSOR, v-
`PROVIDE NEW NUMBER OF UNITS AND ACCOUNT BALANCES
`I
`SEND REPORTS VIA FAX/MODEM TRANSFER I OR PRINT
`REPORTS AND SEND BY MAIL OR COPY REPORTS TO
`REMOVABLE DIGITAL STORAGE AND SEND BY MAIL
`I
`CONVERT ACCOUNT INFORMATION INTO FORMAT
`FOR COMMERCW. DATABASE SYSTEM
`I
`UPDATE DATABASE WllH NEW PARTICIPANT INFORMATION
`AND MUTUAL FUND INFORMATION
`I
`IMPORT CENSUS INFORMATION FROM INFORMATION BUREAU
`OR DEFERRAL INFORMATION FROM PLAN SPONSOR
`I
`UPDATE ASSET MANAGER & DATABASE WITH DATA
`RECErt/ED THROUGHOUT THE DAY FROM THE BBS
`AND AUTOMATED VOICE RESPONSE UNIT
`
`44
`
`v- 46
`
`f-.-
`
`48
`
`-- 50
`
`v- 51
`
`--- 52
`
`8
`
`FIC.2B
`
`Ex. 1016 - 4/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 4 of 15
`
`5,926,792
`
`START
`
`SELECT AS A PRESENT ASSET GROUP ONE OF THE
`ASSET GROUPS WHICH
`IS USED TO COVER PlAN
`SPONSORED FUND LIABILITIES
`
`CONTACT ASSET MANAGER TO DETERMINE THE PRESENT
`CASH VALUE OF EACH lYPE OF ASSET (i.e., STOCK,
`MUTUAL FUND, INSURANCE POUCY) HELD BY THE PlAN
`SPONSOR FOR THE CURRENT ASSET GROUP
`
`---60
`
`!..--62
`
`READ FROM THE DATABASE THE NUMBER OF EACH TYPE OF --- 64
`
`INVESTMENT ASSOCIATED WITH THE CURRENT ASSET GROUP
`
`MULTIPLY THE NUMBER OF UNITS FOR EACH TYPE ~
`66
`OF INVESTMENT BY THE DETERMINED CASH VALUE
`
`STORE THE RESULT OF THE MULTIPUCATION IN THE
`DATABASE AS THE PRESENT ASSET VALUE FOR THE
`CURRENT ASSET GROUP
`
`--- 68
`
`70
`
`y
`
`MORE
`ASSET GROUPS?
`
`N
`
`END
`
`FIC.3
`
`Ex. 1016 - 5/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 5 of 15
`
`5,926,792
`
`START
`
`SELECT ONE OF THE PlAN SPONSORED
`HYPOTHETICAL FUNDS AS A CURRENT FUND
`
`v- 80
`
`TO DETERMINE THE PRESENT PER UNIT SEWNG PRICE
`OF THE CURRENT FUND
`
`CONTACT INFORMATION PROVIDER (i.e., DOW JONES BBS) --82
`--84
`
`READ FROM THE DATABASE THE NUMBER OF OUT-
`STANDING UNITS ASSOCIATED WITH THE CURRENT
`FUND THAT ARE HELD BY THE PlAN PARTICIPANTS
`
`MULTIPLY THE NUMBER OF OUTSTANDING UNITS
`FOR CURRENT FUND BY THE PRESENT PER UNIT
`SEWNG PRICE
`
`v- 86
`
`STORE THE RESULT OF THE MULTIPLICATION
`IN THE DATABASE AS THE CURRENT LIABILilY
`OF THE CURRENT FUND
`
`I--88
`
`90
`
`y
`
`MORE FUNDS?
`
`N
`
`END
`
`FIC.4
`
`Ex. 1016 - 6/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 6 of 15
`
`5,926,792
`
`ALLOCATION SUMUARY ASSET GROUP
`
`PRWECT NAME:
`CEMENT
`SPONSOR NAME: X'(l MANUFACTURING
`PWI GROUP NAME: GLOBAL WEALTii
`
`THE INCOME UNK
`
`8
`
`FUND NAME
`DATE
`f/15/95 PRDliiY IIOHO
`2/15/95
`SUPER LEVERAGED
`104
`2/15/95
`INCOME &: GROWTH
`2/15/95 ~ED
`2/15/95
`THE ffl's FIXED INCOME
`102/
`
`REPORT DATE:
`
`8/17/95 2:10:03 PM
`
`TOTAL LIABIUlY:
`TOTAL ASSET:
`
`$11,097,301,80
`$6,430,754.96
`
`l.IABilflY
`
`ASSET~
`
`BENCHMARK
`
`5%
`
`\
`106
`
`$1,019,648.75
`$955,274.50
`$1,317,666.56
`$1,958,238.09
`
`9.19%
`8.61%
`11.87%
`17.65%
`
`$5,250,827.90
`
`47.32%
`
`$1,923,315.03
`$1,932,315.03
`
`30.05%
`30.05% ~
`
`BAlANCE DIFFERENCE:
`
`$3,318,512.87
`
`THE UQUID UNK
`
`BENCHMARK
`
`DATE
`8 104{ 2/15/95
`2/15/95
`2/15/95
`
`FUND NAME
`
`l.IABilflY
`
`ASSET~
`
`CRITICAL MONEY MARKET
`SM.6U GAINS
`'tfZ's UQUID
`102/
`
`$1,545,746.80
`$1,455,964.06
`
`13.93%
`13.12%
`
`$3,001,710.86
`
`27.05%
`
`$1,283,124.95
`$1,283,124.95
`
`19.95%
`19.95% ---17.10%1
`
`BAlANCE DIFFERENCE:
`
`$1,718,586.91
`
`5%
`
`\
`106
`
`FUND NAME
`DATE
`-+--- l.IABilflY -~
`- - - - - - -
`8 104{ 2/15/95 MONSTER GROWTH
`2/15/95
`GROWTH
`'IJl.'s SUPER GROWTH
`2/15/95
`
`THE STOCK FUND UNK
`
`1 021
`
`BENCHMARK
`
`5%
`
`~-ASSET~ \
`106
`
`$3,215,324.98
`$3,215,324.98
`
`50.00%
`50.00% ~124.36%1
`
`$878,480.78
`$1,966,282.36
`
`7.92%
`17.72%
`
`$2.844.763.14
`
`25.63%
`
`BALANCE DIFFERENCE:
`
`$370,561.84
`
`TOTALS:
`
`1111,097,301.901
`FIC.5
`
`1$6,430,764.961
`
`Ex. 1016 - 7/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 7 of 15
`
`5,926,792
`
`START
`
`CONTACT ASSET MANAGER OF THE DEFINED BENEFIT PLAN ,-- 110
`
`REQUEST CURRENT CASH VALUES OF INSURANCE ~ 112
`POLICIES COVERING EMPLOYEES IF EQUITY IS REMOVED
`
`REQUEST CURRENT CASH VALUE OF INSURANCE
`POLICIES COVERING EACH EMPLOYEE IF, FOR EACH
`EMPLOYEE, THE EMPLOYEE WERE TO DIE
`
`--- 114
`
`GENERATE ASSET RANGE INDICATING THE
`POTENTIAL VALUES OF THE DEFINED BENEFIT PLAN
`
`IMMEDIATE AND ---
`
`116
`
`UPDATE ASSET RANGE IN DATABASE
`
`--- 118
`
`END
`
`FIC.6
`
`Ex. 1016 - 8/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 8 of 15
`
`5,926,792
`
`START
`I
`FOR EACH DEFERRAL AT THE PROMISED INTEREST RATE FOR
`THE DEFINED BENIFIT PlAN, CALCULATE THE AGE 65 PAYOUT
`I
`MULTIPLY AGE 65 PAYOUT BY PROBABILITY OF THE CORRESPONDING
`PARTICIPANT DYING AT EACH AGE BEFORE 65 TO DETERMINE EXPECTED
`PREMATURE PAYOUT AND MULTIPLY BY THE PROBABILITY OF REACHING
`AGE 65 TO DETERMINE EXPECTED FULL PAYOUT
`I
`DETERMINE EARLY WITHDRAWAL PAYOUT FOR EACH AGE BEFORE 55 FOR EACH
`
`I
`MULTIPLY WITHDRAWAL PAYOUT BY PROBABILITY OF WITHDRAWAL AT
`EACH AGE BEFORE 55 TO DETERMINE THE EXPECTED/ESTIMATED PAYOUT
`I
`DETERMINE EARLY RETIREMENT PAYOUT FOR EACH AGE AFTER 55
`AND BEFORE 65 FOR EACH DEFERRAL IF THE CORRESPONDING
`PARTICIPANT RETIRES EARLY FROM THE PROGRAM
`I
`MULTIPLY EARLY RETIREMENT PAYOUT BY PROBABILITY OF EARLY
`RETIREMENT FOR EACH AGE AFTER 55 AND BEFORE 65 TO DETERMINE
`THE EXPECTED/ESTIMATED EARLY RETIREMENT PAYOUT
`I
`SUM TOTAL FROM STEPS 122, 126 AND 130 TO DETERMINE TOTAL
`EXPECTED/ESTIMATED LIABILITY FOR THE DEFINED BENIFIT PLAN
`I
`UPDATE ESTIMATED LIABILITY IN DATABASE
`
`DEFERRAL IF THE CORRESPONDING PARTICPANT WITHDRAWS FROM THE PROGRAM -- 124
`
`f.--
`
`120
`
`1--122
`
`f--
`
`126
`
`-- 128
`-- 130
`--
`
`132
`
`f.-- 134
`
`FIG. 7
`
`I
`END
`
`Ex. 1016 - 9/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 9 of 15
`
`5,926,792
`
`DEFINED BENEFIT ALLOCATION SUMMARY
`
`140
`CURRENT CASH/
`VALUE
`
`142
`DEATH BENEFIT/
`VALUE
`
`ESTIMATED --144
`LIABILITY
`
`$ 27,000
`
`$ 1,000,000
`
`$ 45,000
`
`146
`
`BENCHMARK /
`
`$ 10,000
`
`FIC.B
`
`Ex. 1016 - 10/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 10 of 15
`
`5,926,792
`
`2
`
`CENSUS
`INFORMATION
`
`FIC.9
`
`Ex. 1016 - 11/26
`
`

`

`N
`\C
`......::.
`....
`0\
`N
`\C
`....
`Ul
`
`'"""' Ul
`'"""' 0 ......,
`'"""'
`~ .....
`'JJ. =-~
`
`~ = :-
`
`'0
`'0
`'"""'
`'0
`~=
`N
`
`~ = ......
`~ ......
`~
`•
`\Jl
`d •
`
`BALANCES
`CALCULATE
`
`lJllll HOUSE
`1fiTit CLEARING
`
`c=J ASSET MANAGER CONNECTION (NOT NECESSARILY DAILY)
`c=J SPONSOR CONNECTION (NOT NECESSARILY DAILY)
`
`VRU IMPORT
`
`DAlLY CYCLE
`
`ADIJINISTRATION SYSTEU
`SKYCOMPIM
`
`ALLOCATIONS
`
`~
`
`FIC.IO
`
`CLIENT
`
`I I IS HIGHER OR LOWER THAN PRE-
`D Skycomp G£N£RA[S 5:-CAIJliL\[
`
`DETERMINED LEVELS
`
`EMPLOYER IF ALLOCATION RATIO
`ALLOCATION AND ALERTS TH
`THE PARTICIPANTS ASSET
`
`INSTRUCTIONS
`DAILY PAYMENT
`
`I
`
`~ SERVER
`
`LJ
`
`fTT ffii7
`~
`~ @j
`
`I REPORTS ARE SENT TO CLIENT BASED
`
`REPORTING
`
`MANAGER
`ASSEL
`
`·DISKETTE
`·HARD COPY /MAIL f:]
`·MODEM TRANSFER
`·FAX
`ON SCHEDULE CHOSEN
`
`Ex. 1016 - 12/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 12 of 15
`
`5,926,792
`
`SYSTEM PROCESSES
`CENSUS INFORMATION
`I
`SYSTEM DETERMINES
`PREMIUM/FACE AMOUNTS
`I
`SYSTEM CALCULATES
`INITli\L PREMIUM CHARGES
`I
`SYSTEM NOTIFIES INVESTMENT
`MANAGER OF AMOUNT TO
`INVEST
`I
`INVESTMENT MANAGER NOTIFIES
`SUB-ADVISOR AND WIRES MONEY
`I
`SUB-ADVISOR PURCHASES SECURITIES AND SENDS
`DOCUMENTATIONS TO
`INVESTMENT MANAGER
`r
`SVP WRITER (IF APPLICABLE) CONTACTS
`SUB-ADVISOR FOR INFORMATION REGARDING
`YIELD-TO-MATURITY (YTM) OF SECURITIES
`I
`INVESTMENT MANAGER CREATES INITli\L UNIT
`VALUE OF FUND, COMMUNICATES TO SYSTEM
`I
`SYSTEM STORES INITIAL
`UNIT VALUE OF POLICY
`
`FIC.ff
`
`1---- 1104
`
`1108
`~
`
`~ 1112
`
`~ 1116
`
`~ 1120
`
`v-- 1124
`
`1-- 1126
`
`1-- 1128
`
`1-- 1130
`
`Ex. 1016 - 13/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 13 of 15
`
`5,926,792
`
`SYSTEM CALCUlATES FEES FOR MORTAL11Y-EXPENSE (M&E)
`ACCOUNT MANAGEMENT, SUB-ADVISOR AND SVP WRITER, IF APPUCABLE
`
`l--
`
`1204
`
`SYSTEM CALCUlATES CREDITS DUE TO CURRENT DAY'S VALUE
`OF SVP, (NOTE: FOR NON-SVP FUNDS, THE CREDIT EQUALS
`YESTERDAY'S GROWTH
`IN THE UNDERLYING SECURmES
`
`__..- 1212
`
`IMPORTS CURRENT DAY'S INVESTMENT VALUE AND VALUE
`SYSTEM
`OF UNDERLYING SECURmES FROM THE INVESTMENT MANAGER
`
`__..-
`
`1216
`
`SYSTEM NOTIFIES SVP WRITER OF CURRENT DAY'S INVESTMENT
`VALUE AND VALUE OF UNDERLYING SECURmES
`
`v-
`
`1218
`
`SYSTEM CALCULATES POUCY VALUE, AND CALCULATES AND STORES
`CURRENT DAY'S POUCY UNIT VALUE ACCORDING TO:
`UNIT VALUE {CURRENT DAY) = VALUE (CURRENT DAY)/UNITS
`
`~ 1219
`
`INVESTMENT MANAGER
`REMOVES M&E FEES,
`ACCOUNT MANAGEMENT FEES,
`
`1220 -- POUCY SUB-ADVISER FEES
`
`AND SVP FEES FROM
`THE VALUE OF THE
`UNDERLYING SECURmES
`
`SYSTEM ACCUMULATES M&E,
`ACCOUNT MANAGEMENT,
`INVESTMENT MANAGEMENT
`AND SVP FEE UNITS DAILY,
`FOR REDEMPTION AT THE
`END OF THE MONTH
`
`f-- 1222
`
`FIC. 12
`
`Ex. 1016 - 14/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 14 of 15
`
`5,926,792
`
`CARRIER, ACCOUNT MANAGER, SVP WRITER, AND SUB-ADVISOR SELL
`"FEE UNITS'' TO INVESTMENT MANAGER AT THE DAY'S INVESTMENT v- 1304
`UNIT VALUE.
`INVESTMENT MANAGER ADJUSTS THE NUMBER
`OF INVESTMENT UNITS HELD BY EACH
`
`INVESTMENT MANAGER REMOVES THE VALUE OF THE "FEE UNITSu
`FROM THE UNDERLYING SECURITIES VALUE AND TRANSFERS CASH TO
`THE CARRIER, ACCOUNT MANAGER. SVP WRITER AND SUB-ADVISER
`
`I-- 1308
`
`FIC./3
`
`POLICY OWNERS SELL POLICY UNITS TO SYSTEM TO PAY FOR MONTHLY
`
`COST FOR INSURANCE {COl) FEES AND ADMINISTRATION FEES. SYSTEM ---- 1404
`
`ADJUSTS THE NUMBER OF POLICY UNITS HELD BY THE POLICY OWNER
`
`SYSTEM SELLS EQUIVALENT DOLLAR AMOUNT OF INVESTMENT UNITS.
`INVESTMENT MANAGER ADJUSTS THE NUMBER OF THE INVESTMENT
`UNITS THEN HELD BY THE SYSTEM
`
`I-- 1408
`
`INVESTMENT MANAGER REMOVES THE VALUE OF THE
`COl AND ADMIN. FEES FROM THE UNDERLYING SECURITIES
`VALUE AND TRANSFERS CASH TO CARRIER
`
`1-- 1412
`
`SYSTEM CALCULATES ONGOING
`MORTALITY RESERVE ACTIVITY
`
`~ 1416
`
`FIC.14
`
`Ex. 1016 - 15/26
`
`

`

`U.S. Patent
`
`Jul. 20, 1999
`
`Sheet 15 of 15
`
`5,926,792
`
`SVP WRITER COLLECTS INFORMATION FROM INVESTMENT
`MANAGER REGARDING BOOK AND MARKET VALUE
`
`~ 1504
`
`SVP WRITER COLLECTS INFORMATION FROM SUB-ADVISOR REGARDING
`DURATION OF UNDERLYING SECURITIES AND YIELD-TO-MATURilY
`
`r--- 1508
`
`FIC.15
`
`SVP WRITER CALCUlATES TARGETED
`RETURN FOR UPCOMING QUARTER
`
`v-1604
`
`FIC.16
`
`SYSTEM PROCESSES
`DEATH ClAIMS
`
`.FIC.17
`
`--1704
`
`Ex. 1016 - 16/26
`
`

`

`5,926,792
`
`1
`SYSTEM FOR MANAGING A STABLE
`VALUE PROTECTED INVESTMENT PLAN
`
`This application is a continuation of Ser. No. 08/709,882
`filed on Sep. 9, 1996.
`
`BACKGROUND OF THE INVENTION
`
`1. Field of the Invention
`This invention relates to an automated system for
`tracking, reconciling and administering the values of life
`insurance policies in separate account, including stable
`value protected funds.
`2. Discussion of the Background
`For many years the majority of employee benefits have
`been funded through the purchase of stocks, mutual funds,
`corporate owned life insurance (COLI) and annuities. The
`value of these assets was generally provided on a quarterly
`or monthly basis, and the liabilities of these benefit plans
`have generally been made available on an annual or perhaps
`quarterly basis. Therefore, plan sponsors have had to wait
`six to twelve months for information about the current
`funded status of a benefit plan. In addition, changes in the
`tax code in the past few years have reduced benefits to
`highly compensated employees (HCE), that is, persons
`earning over $60,000 to $70,000 per year, as defined in the
`tax code.
`In response to this decrease in benefits, companies are
`installing plans commonly known as Non-Qualified
`Deferred Compensation (NQDC) plans which offset some of
`the benefits being lost. By deferring money tax-free from
`employees and investing the deferred money in Elective
`Deferral Defined Benefit plans or Elective Deferral Defined
`Contribution plans, the NQDC plan helps employees regain
`lost benefits. Elective Deferral Benefit plans offer various
`fixed returns on the deferred salary (or other benefits) of an
`employee depending upon the amount of money deferred
`and the number of years the money is deferred. A deferral of
`a $1,000 will be used as an example. The plan promises a
`7.5% return each year until the normal retirement age of 65.
`If the deferral is made at 64, then the maturity value is
`$1,075, and the balance is paid out in a lump sum. If desired,
`a participant may choose to retire early, at any age after
`turning 55. If a participant retires before age 65, the account
`balance promised at 65 is reduced by 7% for each year prior
`to age 65. If a participant leaves the company prior to
`attaining age 55, the participant is given the initial deferral
`plus a 5% interest credit for each year since the initial
`deferral. If a participant dies prior to retiring, the beneficiary
`receives the promised age 65 balance immediately.
`Elective Deferral Defined Contribution plans work like
`investing in mutual funds. For example, when a deferral of
`$1,000 is made, the participant elects to invest his money in
`at least one of several funds sponsored by his employer.
`(Employers may offer several funds, e.g., a Bond fund, a ss
`Balanced fund, a fund which tracks the "Standard & Poor's
`500" average minus a fixed percentage, etc.). At the time of
`deferral, the employee selects the Bond fund trading at
`$100/unit. The $1,000 is converted into 10 units based on the
`value of the fund on the day that the deferral is made. As the
`plan sponsor hold the liability for the employee/plan
`participant, the unit value is then adjusted daily to reflect the
`net value of the fund, plus any dividends or accruals paid.
`The value of the employee's investment is equal to the
`number of units multiplied by the unit value of the fund on 65
`the day of conversion. Therefore, if the per unit value of the
`Bond fund was $175, then the investment would be worth
`
`2
`$1,750. Plan participants may also transfer deferred pay(cid:173)
`ments between Defined Contribution and Defined Benefit
`plans and between funds in the Defined Contribution plans.
`However, the funds are hypothetical funds used to deter-
`s mine the return due to an employee and need not correspond
`to any real fund directly. For example, when a deferral is
`made to the bond fund, the plan sponsor may not actually
`choose to buy any funds relating to bonds, the plan sponsor
`may actually buy stocks, insurance policies or other annu-
`10 ities instead. The plan sponsor only promises to provide the
`return of the hypothetical fund (e.g., the rate of increase of
`the "Standard and Poor's 500oo minus some fixed
`percentage, the real value of the "Standard and Poor's 500"
`minus some fixed dollar amount, etc.). In fact, in cases
`15 where an asset group is overfunded (i.e., the assets exceed
`the liabilities), the excess assets may be transferred to other
`under-funded plans.
`Furthermore, the regulations that apply to these plans
`restrict the manner in which these plans can be funded. In
`20 essence, companies may not directly fund the liabilities
`created by these plans, whereas the companies can directly
`fund their qualified plans. Instead of providing direct
`funding, a plan sponsor invests the unsecured deferrals in
`financial instruments of the plan sponsor's choosing (e.g.,
`25 mutual funds, variable policy insurance policies, etc.) to
`cover the liability corresponding to each participant's invest(cid:173)
`ment choices. Because plan sponsors may not actually be
`investing in funds similar to the funds requested by the plan
`participants, plan sponsors need to have more immediate
`30 access to information regarding their plans. This enables the
`sponsor to cover its liabilities by reallocating its assets as
`participants reallocate their assets. The volume and tim eli(cid:173)
`ness of information is critical to a successful NQDC plan,
`and the traditional methods of providing information quar-
`35 terly or annually have proven to be unacceptable. Since plan
`sponsors are receiving information and changes on a daily
`basis, the chances of a mismatch between the values of plan
`assets and liabilities have traditionally been high. Finally,
`participants were previously largely uninformed as to the
`40 value of their deferred money and benefits. Participants
`traditionally received a statement once a year, with no
`projections, and little information as to how the benefit was
`calculated. The dearth of information available to sponsors
`and participants has caused many companies to avoid the
`45 use of NQDC plans, thereby denying participants a chance
`at benefit restoration.
`In addition to NQDC plans, corporate owned life insur(cid:173)
`ance policies are an efficient funding mechanism for
`employee benefits. The nature of COLI allows corporations
`so to invest money in mutual fund-type investments and ulti(cid:173)
`mately receive the growth on the investment tax free.
`Typically, corporations have had to account for this invest(cid:173)
`ment on a mark-to-market basis. This means that the under-
`lying investments were valued at market each year and
`therefore were subject to the volatility of the investment.
`This has caused some corporations to avoid COLI
`purchases, even though as a long-term investment it is
`highly advantageous for corporations.
`One solution to the above problem is to invest in a new
`60 and useful investment division known as a Stable Value
`Protected Investment. This investment smoothes the return
`associated with the underlying investment. For example,
`over the long term, the Standard and Poor's 500 may be
`expected to increase by 10% annually. However, during the
`long term, the annual returns may be +15%, -2%, +8%,
`-5%, etc. In order to smooth the returns, the investments in
`a Stable Value Protected Investment would create returns of
`
`Ex. 1016 - 17/26
`
`

`

`3
`10%, 6%, 8%, 6%, etc. Over the long-term, the Stable Value
`Protected Investment would perform equal to the underlying
`investment, less the fee for the Stable Value Protection, but
`would provide smoothing along the way.
`Another use for the Stable Value Protected Investment is 5
`to reduce the impact of initial fees associated with the
`purchase of COLI. First year fees include Premium Tax,
`Deferred Acquisition Cost (DAC) Tax and Sales Loads. The
`assessment of these fees has the effect of decreasing the
`corporation's return on its investment for the first few years. 10
`A solution to the initial decrease is to increase the return on
`the Stable Value Protected Investment initially, then use the
`smoothing nature of the Stable Value Protection in future
`years to "pay back" the initial increase. For example, the
`targeted return calculated by the Stable Value Protection 15
`writer may be increased by 3% for the first year, 2% for the
`second year and 1% for the third year in order to reduce the
`perceived impact of the first year expenses on the cash value
`of the policy.
`The Stable Value Protected funds provide an initial tar(cid:173)
`geted return for the first period of an investment. Upon
`completion of the first period, the value of the fund, the
`"market value," is compared with the "calculated" value of
`the fund which is the "book value." The "calculated" value
`of the fund is calculated by multiplying the initial value of 25
`the fund by (1 +targeted return), wherein the targeted return
`for the next period is calculated using the formula:
`
`TR~[(MV!BV)<11Dlx(1+YIM)]-1,
`
`where CR is the targeted return, MV is the market value of
`a fund, BV is the book value of a fund, D is the duration of
`a fund and YTM is the current yield to market. The purpose
`of this calculation is to insure that the book value and the
`market value move closer together over a period of time, 35
`namely the duration of a fund. The targeted return is reached
`by investing in a security whose value fluctuates daily and
`whose purpose is to make up the difference between the
`actual return and the targeted return.
`The duration of a fund was first described by FrederickA 40
`Macaulay in Some Theoretical Problems Suagested by the
`Movements of Interest Rates. Bond Yields, and Stock Prices
`in the United States Since 1866, published by the National
`Bureau of Economic Research in 1938 and incorporated
`herein by reference. The duration of security provides a 45
`measure of both the coupon of a bond and the term to
`maturity. Macaulay showed that duration was a more appro(cid:173)
`priate measure of the time element of a bond than term to
`maturity because it takes into account not only the ultimate
`recovery of capital at maturity, but also the size and timing 50
`of coupon payments that occur prior to final maturity.
`Duration is defined as the weighted average time to full
`recovery of principal and interest payments, using annual
`compounding. Duration (D) is defined as:
`
`D~
`
`n C1(t)
`~(l+i)l
`f' c,
`
`u(l+iJ'
`l=l
`
`where t=the time period in which the coupon and/or prin(cid:173)
`cipal payment occurs, C,=the interest and/or principal pay(cid:173)
`ment that occurs in period t and i=the market yield on the
`bond. The denominator in the equation for duration is the
`price of an issue as determined by the present value model,
`
`5,926,792
`
`4
`and the numerator is the present value of all cash flows
`weighted according to the length of time until receipt. This
`concept of duration is also disclosed in ANALYSIS AND
`MANAGEMENT OF BONDS, Chapter 18---PRINCIPLES
`OF BOND EVALUATION, by Frank K. Reilly which is
`incorporated herein by reference.
`Using the concepts of duration and targeted return, the
`actual performance of the underlying securities in the fund
`is smoothed over time. The funds are created on a client(cid:173)
`by-client basis, and therefore each client is subject to its own
`past performance when its targeted return is calculated.
`Consequently, each client will have a different targeted
`return.
`
`SUMMARY OF 1HE INVENTION
`
`It is therefore an object of the present invention to
`overcome the disadvantages of the prior art systems.
`It is another object of the present invention to provide a
`system capable of tracking and reporting assets and liabili-
`20 ties on a near real-time basis, a system that can project assets
`and liabilities into the future, and a system that makes the
`administration of NQDC plans simple, while keeping costs
`low for plan sponsors.
`It is a further object of the invention to provide a system
`capable of tracking liabilities in both Defined Contribution
`and Defined Benefit plans.
`It is a further object of the present invention to provide
`plan participants with timely access to plan information
`30 using modem, fax or automated voice response units.
`It is yet another object of the present invention to provide
`plan sponsors with timely access to liability information by
`determining plan participants positions in the Defined Con(cid:173)
`tribution and Defined Benefit plans.
`It is yet another object of the present invention to provide
`plan sponsors with a means for calculating the liabilities of
`a Defined Contribution plan by contacting an external data
`provider by phone to determine the unit value of funds
`offered by the plan.
`It is an additional object of the present invention to
`provide a means for the plan sponsors to determine plan
`assets by contacting external data sources to receive the
`values of insurance policies and financial instruments held
`by the plan sponsor.
`It is an additional object of the present invention to
`provide a means for associating liabilities with assets and
`measuring an absolute dollar or percentage difference
`between the liabilities and their associated assets.
`It is a further object of the present invention to provide a
`means of reporting to a plan sponsor that the assets and
`liabilities of a plan have values outside of a specified ratio
`or differential.
`It is a further object of the present invention to provide a
`55 means of reconciling charges reported by an asset manager
`with internally calculated values for what the changes
`should be based on known transaction and management
`costs.
`It is an object of the present invention to track, reconcile
`60 and administer the values of life insurance policies invested
`in separate accounts, including Stable Value Protected funds.
`It is a further object of the present invention to provide a
`system to track, reconcile and administer life insurance
`policies in Stable Value Protected funds which smooth the
`65 return associated with the underlying investments and which
`amortize the initial fees associated with each premium
`payment over several years.
`
`Ex. 1016 - 18/26
`
`

`

`5,926,792
`
`5
`
`5
`The above objects and other objects are achieved accord(cid:173)
`ing to the present invention, by providing a computer system
`capable of tracking assets and liabilities for a NQDC plan
`stored in the computer system. The computer system deter(cid:173)
`mines the value of assets in the plan by calling an informa-
`tion warehouse (e.g., the Dow Jones Bulletin Board Service,
`insurance companies, investment companies, etc.) and
`requesting the current unit value of each asset held by the
`plan sponsor. The number of units of each asset times the
`value of each asset determines the current total asset value 10
`of the fund.
`On the other hand, the total liabilities are calculated so
`they can be compared against the total assets. The total
`liability of a Defined Contribution plan is determined by
`multiplying the number of fund units held by plan partici- 15
`pants in each fund by the unit values for the funds for that
`particular day. The number of fund units a participant buys
`when a user defers money is calculated in the computer
`system by converting the dollar amount of a user transaction
`(deferral, transfer among funds, realignment of fund 20
`allocation) into a number of fund units that the user can
`purchase for that amount on the day the transaction is made.
`The current system draws on the teachings of actuarial
`statistics to estimate/predict statistically what assets are
`needed to cover incurred liabilities. Additional books cov- 25
`ering the subject of actuarial statistics/mathematics are Actu(cid:173)
`arial mathematics by Newton L. Bowers, Jr., et al., Society
`of Actuaries' textbook on life contingencies by Chester
`Wallace Jordan, Jr. and The theory of interest and Funda(cid:173)
`mentals of numerical analysis, both by S. G. Kellison; the
`subject matter of the books is incorporated herein by refer(cid:173)
`ence.
`The above objects relating to tracking, reconciling and
`administering the values of the life insurance policies in
`separate accounts, including Stable Value Protected funds,
`are achieved according to the present invention by providing
`a computer system for managing an insurance product
`purchase. According to the present invention, the targeted
`returns are translated into unit values (UV) on a daily basis
`for each fund. To perform these functions, the present
`invention calculates and stores, for each fund, the following:
`the fund duration, the portfolio allocation, the targeted return
`given the market value and duration of the fund, the current
`yield-to-market, and the stored book value. The invention
`further tracks restrictions (e.g., timing, amount of with- 45
`drawal and amount of reallocations) on a premium-by(cid:173)
`premium basis, and tracks the book value, market value,
`duration and targeted return on a client-by-client basis. The
`invention also calculates and tracks the payments and credits
`applicable to a withdrawal or reallocation request in addition 50
`to the liquidation schedules for each fund based on the
`payment amounts and credits of specific funds. Additionally,
`the present invention calculates daily unit values given a
`periodic targeted return (i.e., a quarterly targeted return).
`
`6
`FIG. 4 is a flowchart showing how liabilities are updated
`for an Elective Deferral Defined Contribution plan;
`FIG. 5 is a report showing a hypothetical set of assets and
`liabilities contained within a Deferral Defined Contribution
`plan and FIG. 5 also shows the tolerance parameters defined
`to indicate now closely the assets should correspond to the
`liabilities;
`FIG. 6 is a flowchart showing how curren