2O.!,c:
TIIE ATIVB~EY GENEKAL
~PTE~As
Hon. William A. Harrison c+hxLHo..ww-435
Commissioner. of lamrance~
State Board of Iusurance Re:. Ar&::3.39; ~&tion 4, Texas
Austin 14, Texas xa8rYaacc.c~ xnveemeats
by a life i~eurance ,company in
the rtocka of a subsidiary
carporati~@th aa agreement
pUaa!~by@e.pu,ent corporation
to buy. wx.& stocks from the
Dear Mr. Harrima: iasuraace company.
‘Wes&modebge.reciipr.~ your3etteroi~ar~h n,l9gg, re-
questing an opiaiqa from tbis~department upoa+a:grwation arising from
tbe following facts:
**A Texas life inguraace compauy owns and holds
54OQ.000 in the preferred stocks of .tv&ty.acparate
‘and distinct variety atores whichhavebeen iacorpora-
ted. These variety store corporatioue;o.not~Sn and of
themselves meets the requirements offsection 4 .of Arti-
cle 3.39, of the Iasuraace~Code to make the 8tocks legd
investments as the corporationaare;aat.five ~years old.
The common stocks of eacbd tbeeetwenty incorporated
variety etores are .wbolly :ewned~by a. larger ~corporated
store company~ The atore company directa the opera-
tions of each of the su~idiary,.vuiety,stores.
“When the life insurance company invested in the
preferred.stocki of the incorporatedvariety stores,
the parent store-c&npany.executed an agreement with
the life insurance company..to purchase from the life
insurance company, the preferred s~tockat a purchase
price equal to the .redemption .price specified in the pre-
ferred stock certificates. The store-company further
agreed that in the event the variety stores failed to de-
clare and pay a semi-annual dividend of 6% per annum -
on their preferred stock at the time same was due and
payable, to purchase from the life insurance company all of
Hon. William A. Harriaon, page 2 (WW-435).
the outstanding, and redeemed preferred stock of the
variety stores for a purchase price equal to the re-
demption price specified in the raid preferred stock
certificates.
“Does the inveatmcnt of the clubaidiary corpora-
tion variety rtore’r stocks, together with the repur,-
chase agreement executed by the parent corporation,
conetituti an investment within the authority of Arti-
cle 3.39, Section 4, of the lmurance Code, in the
‘securities’ of the parent corporation?”
The applicable cltatutory proviajdn drawn in question by
the above fact situation, and applicable thereto, is Article 3.39, Sec-
tion 4, of, the Teicaa Insurance Code, a portion of which reads as
follows:
“A life insurance company organized under the
law df thie State may invest in or loan upon the follow-
ing securities, and none other, viz.
“4 . . . . the capital rtock, bonds, bills of exchange
and/or commercial notes for billa and securities of any
solvent corporation which ha.9 not defaulted in the.pay-
ment of any debt within five years next preceding such
investment, or of any solvent corporation which has not
been in existence for five consecutive years next pre-
ceding such inve etment’pr ovided such torpor ation has
succeeded to the budness and aosete and has assumed
the, liabilities of another corpor.ation, which corporation
and the corporation 60 rucceeded have not defaulted in
the payment of.any debt within five years next preceding
such investment . . .I’
It may be Seen that since 1909 the Legislature of Texas
has regulated the investments of the funda of life insurance com-
panies organized under the laws of Texas as a separate, distinct,
and exclusive .field of legislation. The laws thereon have been spe-
cial and restricted, Succeeding session8 of the Legislature have
surrounded these companies with particular and specific regulations.
In 1951, the 52nd Legislature of Tewe brought forward,
what was then the old Article 4725, and placed it, without subrtantial
Hon. William A. Harrison. page 3 (WW-435).
change, into the Insurance Code of the State of Texas under its new
number 3.39, portions of which are quoted above. This department
has had occasion to state its position with regard to Article 3.39,
Section 4, involving the investments of Texas life insurance com-
panies. In Attorney General’s Opinion No. WW-293-A, the position
of the department was thus stated:
“A life insurance company cannot invest its
capital, surplus and contingency reserves in the
stock or commercial notes of any company which
has not been in existence for a period of five years
next preceding the date of such investment.”
Thus the present problem resolves itself down to whether
or not a guaranty or warranty agreement by a parent corporation may
override the otherwise clear requirements of the legislative mandate.
This department has likewise expressed itself regarding the above
qualification under a pevioue administration in Attorney General Gpin-
ion No. )-3015, in which was stated:
“It would thus be seen a security to be eligible for
either class (speaking of life insurance corporations
under 4725 and insurance corporations other than life
under 4706) of these Texas corporations must be the
direct obligation of the issuing corporation. The statu-
tory definition of eligible securities excludes, therefore,
stocks or shares evidencing merely participating inter-
ests by the holders in the net profits, if any, of the issu-
ing concern.”
The position of this department is further substantiated
by an authoritative announcement in Corpus Juris Secundum which
states as follows:
“investments of insurance corporations cannot be
made in securities other than those prescribed by stat-
ute, and indirect evasion of such statutes, as by the
medium of a subsidiary, will not be permitted . . . .
“While an insurance company has implied power
to make investments of its capital, and in the absence
of legislative restriction, it may do so in the manner it
deems most judicious, nevertheless, for the purpose of
protecting policyholders and others, it is usual for the
Hon. William A. Harrison, page 4 (WW-435)
State to provide specifically how the funds of insurance
companies shall be invested. In applying such statutes,
no interpretation of a word, phrase, or sentence con-
tained in a comprehensive investment code should be
made without reference to the scheme of the entire
code . . . .‘I 44 C.J.S. at page 632.
It thus appears that the agreement by the parent corpora-
tion with the investing insurance company by way of a rt-purchase
agreement does not overcome the inability of the subsidiary company
to meet the requirements of Article 3.39 so as to make the invest-
ment legal, within the strict bounds of the legislative enactment. It
would appear that any other construction of this portion of the statute
would be an undue expansion and clearly subvert the intention of the
legislature. From the facts given, it is apparent that the investment
by the life insurance company is an investment in the securities of
the subsidiary corporation and not the securities of the parent corpora-
tion. Thus, we conclude that the investments are merely invtetments
in the stocks of the subsidiary corporation, with additional security
from the parent, and are illegal investments for a Texas insurance
company.
SUMMARY
The fact that a parent corporation, whose stocks
qualify as valid investments guarantees the stock
of a subsidiary corporation whose stocks do not
qualify as valid ,investmants, does not validate
the stocks of the subsidiary so as to be legal in-
vestments for a Texas insurance company.
CDD:ls Very truly yours,
APPROVED: WILL WILSON
i;rnmzs
OPINION COMMITTEE:
Geo. P. Blackburn, Chairman C. Dean Davis
Assistant
Mary K. Wall
.I. Milton Richardson
Fred B. Werkenthin
REVIEWED FOR THE ATTORNEY GENERAL
BY: W. V. Geppert