October 5, 1964 

Honorable J. N. Nutt 

Commissioner of Insurance 

State Bard of Insurance 

Austin, Texas 

Opinion No. C-325 

He: Whether premium 

notes executed by 

Texas residents 

constitute "Texas 

Securities" within 

the meaning of Art. 

7064, V.C.S. 

Dear Mrr Nutt: 

We have your letter requesting our opinion concerning the 

interpretation of Article 7064, Vernon's Clvll Statutes. You state: 

"A roperty-casualty company has filed a tax return under Article 

706[, V.A.T.S and among Its 'Texas Securities' shown on the tax 

return the coibany has listed premium notes made by Texas residents." 

You request our opinion as to,"whether or not premium notes executed 

by Texas residents constitute Texas securities within the meaning 

of Article 7064, V.A.T.S." You enclosed with your letter Commlssioner's Order No. 15333 and a copy of two prior 1etter.s from the 

Attorney General addressed to your department which deal with 

premium notes. 

Your Order No. 15333, dated January 15, 1964, rules that 

premium notes which meet certain standards shall be admitted 

assets of fire and casualty companies. The letter dated October 

11,1'337, from the Attorney General to the Casualty Insurance 

Commissioner advised you that an Insurance company may not lend 

money for the purpose of financing premiums on automobile Insurance 

with such company since the lending of money, for such purpose would 

not be a proper Investment of the funds of such company. The 

Attorney General's letter of August 6, 1938, addressed to the 

Chairman of the Board of Insurance Commissioners, advised: 

"In arriving at the judgment herein concerned, It 

was conceded by this Department that reciprocal 

exchanges may count premiums In course of collection, 

Including prem$um notes, In computing and fii$%ax 

reducing investments." 

-1547- 
Honorable J. N. Nutt, page 2 (c-325 ) 

. . ., 

This letter and the judeent referred to therein will be given 

more attention below, 

The first paragraph of Article 7064, subjects certain 

Insurance corporations, Including casualty companies, to a tax on 

the “total gross amount of premiums received on every kind of 

Insurance or risk written, except premiums received from other 

, llcenaed companle 8 for relnsurance. , ,‘I The second paragraph 

of Article 7064, provides for a graduated reduction of the tax 

rate on gross premium receipts. Under this 9rovlalo~ the tax rate’ 

of the Insurance organization Is tied to”th@ amount that It had 

Invested on the 31st of December, preceding, In Texas Securities 

as defined herein, and the amount that It had Invested on said 

date In slmll,ar securltles In the State In which It had Its highest 

percentage of admitted assets Invested. . , .’ The third paragraph of said Article reads as follows: 

“For the purposes of this Act, Texas securities 

are defined as real. estate In this State; bonds of the 

State of Texas; bonds.or interest bearing warrants of any 

county, city, town, school district or any munlclpallt~ 

or subdivision thereof which Is now or may hereafter 

be constituted or organized and authorized to issues 

. bonds or warrants underthe Conetitutlon and laws of 

this State; notes or bonds secured by mortgage or trust 

deed on property In this State Insured by the Federal 

Housing Administrator; the cash deposits In regularly 

established national or state banks or trust companies 

In this State on the basis of average monthly balances 

throughout the calendar year; that percentage of such 

Insurance company’s Investments in the bonds of the 

United States of America, that Its Texas reserves for 

the unearned premiums and loss reserves as may be 

requlred by the Board of Insurance Conznissloners, 

are of its total reserves; but’thls provision shall 

apply only to United States Qovernment bonds purchased 

between December 8, 1941, and the termination of the 

war In which the United States Is now engaged; In any 

other property In thla State In which by 1st~ such 

Insurance. carriers may Invest their funds. 

It Is clear that premium notes do not come within any of 

the.types of property enumerated by this statute except, poss,lbly, 

the last type. Hence, the question Is reduced to whether premium 

notes executed by Texas residents constitute “other property in this 

state In which by law such Insurance carriers may,lnvest their funds.” 

.-1548- l , 

a .. .: . .,.. . . ..I . . * . . 
- 

. . 

Honorable J. N. Nutt, page 3 (C-325 ) 

Our search for a complete list of such legal Investments produces 

the following results: 

Article 2.10 of the Texas Insurance Code reads, In part, 

as follows: 

'NO company except any writing life, health, 

and accident Insurance, organized under the laws 

of this state, shall Invest Its funds over and 

above Its minimum capital and Its minimum surplus, 

as provided In Article 2.02, except as otherwise 

provided In this Code, In any other manner than as 

follows: 

"1 . As provided for the Investment of Its 

minimum capital and Its minimum surplus In Article 

2.08; 

"2 . In bonds or other evidences of debt which , 

at the time of purchase are Interest-bearing and are 

Issued by authority of law and are not In default as 

to principal or Interest, of any of the States of the 

United States or In the stock of any National Bank, 

In stock of any State Bank of Texas whose deposits 

are Insured b the Federal beposlt Insurance Corporation; . . . PI etc. 

“3 . In bonds or first liens or first mortgages upon 

unencumbered real estate . . . &&CL7 

"4 . In bonds or other Interest-bearing evidences 

or debt of any county, municipality, road district, 

. . . @cJ 

“5 . In the stocks, bonds, debentures, bills of 

exchange or other commercial notes or bills and 

securities of any solvent dividend paying corporation 

. . . @tcJ 

“6 . In loans upon the pledge of any mortgage, 

stock, bonds or other evidence of Indebtedness 

acceptable as Investments under the terms of this 

Article, If the current value of such mortgage, 

stock, bonds or other evidence of indebtedness Is 
. . 

Honorable J. N. Nutt, page 4 (C-325) 

at least twenty-flve per cent (25s) more than the 

amount loaned thereo?; 

"7 . In Interest-bearing notes or bonds of The 

Unlverslty.6f Texas Issued under and by virtue of 

Chapter 40, Acts of the 43rd Legislature, Second 

Called Session; 

"8. In real estate to the extent only as elsewhere authorized by this Code; 

“9 . In Insured accounts and evidences of lndebtedness as deflned and limited by Section 1, Chapter 

618, page 13.56, Acts of the 57th Legislature; In 

shares or share accounts as authorized In Section 1, 

page 76, Acts 1939, 46th Legislature; In Insured or 

guaranteed obligations as authorized In Chapter 230, 

page 315, Acts 1945, 49th Legislature; In bonds 

Issued under the .provlslons authorized by Section 9, 

Chapter 231 

Et@ 

page 774, Acts 1933, 43rd Legislature; 

- * -- 

Article 2.08, referred to above in Article 2.10, reads as 

follows: 

“The minimum capital stock and minimum surplus 

of any such Insurance company, except any writing 

life, health and accident Insurance shall, following 

Incorporation and granting of certlflc,ate of’ Wthorlty;’ ) 

consist only of the following: 

“1 , Lawful money of the United States; or 

“2. Bonds of this state; or 

"3 . %nds or other evidences of Indebtedness 

of the United States of America or any of Its 

agencies when such obligations are guaranteed as 

to principal and Interest by the United States of 

America; or 

"4 . Notes secured by first mortgages upon 

unencumbered real estate In this state, the title 

to which Is valid, and the payment of which notes Is 

Insured, In whole or In part, by the United States 

of America o,r any of Its agencies, provided that 

..i 

-1550- 

. . . I. . .* ,’ ,. .,. .o. 
Honorable J. N. Nutt, Page 5 (C-325 ) 

such Investments In such notes shall not 

exceed one-half (l/2) of the minimum capital stock 

and minimum surplus of lnvestlng'company; or 

“5 . Bonds or other Interest-bearing evidences 

of Indebtedness of any counties, cities or other 

munlclpalltles of this state. . . .' 

By the following statutes the respective types of property 

are declared to be authorized Investments for Insurance companies. 

1. Article 842a, V.C.S., securities Issued by Federal 

agencies; 

2. Article 842a-1, V.C.S., obligations wholly or partially 

Insured by United States or state; 

3. Article 1187a, V.C.S., bonds on bridges over navigable 

waters; 

4. Article 1269k-1, V.C.S., housing authority bonds 

and obligation; 

5. Article 2603d, V.C.S., bonds and notes on University 

of Texas admlnlstratlon and library buildings; 

6. Article 6795b-1, V.C.S., bonds on causeway bridges and 

tunnels In Ciulf Coast countries; 

7. Article 7880-lga,'V.C.S., bonds Issued by Water Control 

and Improvement Districts and municipal districts; 

8. Article 8280-133, V.C.S., bonds Issued by Sablne River 

authority; 

9. Article 8280-134, V.C.S., bonds Issued by Lower Nueces 

River Water Supply District; 

10. Article 8280-137, V.C.S., bonds Issued by Colorado 

River Municipal Water District; 

11. Article 8280-138, V.C.S., bonds lssukd by Jim WellsDuval Counties Conservation and Reclamation District; 

12. Article 8280-139, V.C.S., bonds Issued by Eastland 

County Water Supply pistrict. 

-1551- 
. . 

Honorable J. N. Nutt, page 6 (C-325 ) 

We find no other statutes which deal with Investments by 

casualty Insurance companies. There are other statutes which deal 

specially with Investments by other types of Insurance companies, 

such as life, mutual and fraternal Insurance companies, but they 

are not pertinent to your lnqulry. 

From these statutes It Is obvious that the basic purpose 

of the Legislature In providing for Investments by Insurance 

companies was to provide a high degree of liquidity and safety. 

A premium note signed by a policyholder may or may not be collectible and, in our opinion, would not be an Investment of the type 

contemplated by these statutes. 

Article 7064, which established a tax rate and provides 

for tax-reducing Investments, Is a tax statute, and we are not 

authorized to resort to liberal con= u-in extending Its 

exceptions. All doubts are resolved against the exemption. 

of Longview v. Markham-McNee Memorial Hospital 137 Tex 

S.. .w.2 ) 

94, the S&em: Cobt said: 

5 i W 2d 13; %%i . 

"Exemptions from taxation are regarded not only 

as In derogation of sovereign authority, but of 

common rl ht as well. They must be strictly construed, 

&id?i?it?%nded beyond the express requirements of 

the language used, . . .' (Emphasis theirs) 

A further argument In favor of our conclusion Is found 

In the language used in Article 7064. The "other property" 

provision of this article Is strictly limited by its own terms 

to "property In this state In which by law insurance carriers may 

Invest their funds." It Is noteworthy that the Legislature dld 

not say "other property which may be legally owned by Insurance 

carriers." We think the presence of the word "Invest" Is slgnlflcant. A closely related question was answered by the Attorney 

General In Opinion No. O-6539, approved June 4, 1945. In that 

opinion, It was held that furniture and fixtures belonging to a 

fire Insurance company did not come within the definition of a 

tax reducing Investments set out In Article 7064. That opinion 

concerned the construction of the meaning of the word "lnvestmerit." Numerous definitions of the term were there quoted. A 

typical definition Is that which the opinion quotes from In Re 

Pennocks Will, 35 N.E.2d 177, 285 N.Y. 475, as follows: - 

"An 'Investment' is generally deflned as the 

conversion of money or circulating capital into 

-1552- 
. . 

Honorable J. N. Nutt, Page 7 (C-325 ) 

some species of property from which an Income or 

profit Is expected to be derived In the ordinary 

course of trade or business." 

The opinion holds that the terms "Invest" and "Investments" 

are used In Article 7064 In their ordinary connotation. We see 

nothing In the statutes above quoted that would justify any other 

construction of the terms. The fact that an Insurance company may 

legally purchase and own typewriters or office supplies does not 

mean that these are tax reducing Investments. Similarly, the fact 

that the company, as an Incident to doing business, may extend 

credit upon an open account or open note does not mean that It 

has made a tax reducing Investment within the meaning of the 

statute. Under the above mentioned statutes the only kind of a 

note In whlqh an Insurance company may Invest Its funds Is a secured 

note. Indeed, It may be said that If pm notes were construed 

to be Investments at all, It would put the company In a posltlon 

of having Invested Its funds In a manner violative of Article 2.10 

of the Insurance Code. 

In Lumberman's Insurance Company v. State of Texas, 364 

S.W.2d 429 (Tex.Clv.App. 1963, error ref. n.r.e.), the company 

Invested funds In the stock of a corporation which had been In 

exlstance less than five years prior to the investment as required 

by Subdivision 5 of Article 2.10. The trial court held the 

Investment to be unlawful, thus rendering the company Insolvent 

and subject to the receivership. 'This decision demonstrates the 

reluctance of the courts to liberalize this particular tax 

statute. 

The case of Board of Insurance Commissioners v. Hlghwan 

Insurance Underwriters, lb9 S.W.2d 541 (Tex.Clv.App. 1943) may appear 

20 tave lmpllcatlons contrary to the conclusion we have reacneo, 

but we believe there Is no conflict. As the opinion there 

specifically points out, the trial court had entered a consent 

judgment holding, among other things, that premium notes were taxreducing Investments of reciprocal and Inter-insurance exchanges. 

The trial court also ,held In favor nf lntervenors, Insurance carriers 

other than those in whose favor the agreed judgment had been entered. 

On appeal from the judgment In favor of the lntervenors the question 

'was raised as to whether this was a,class action judgment which 

Inured to the benefit of other Insurance carriers, Including the 

appellees. The Court of Civil Appeals held that It was a class 

action, afflrmlng the trial court judgment on this point, but 

reversing It on other grounds. The Court was not called upon to 

-1553- 
. . 

Honorable J. N. Nutt, page 8 

pass upon the correctness of 

. . 

(c-325 ) 

the terms of the agreed judgment. a. - . The Court quoted In its entlrety the Attorney tieneral's letter 

dated August 6, 1938, referred to above, which had been written 

after the trial court had entered the agreed judgment. Whatever 

dignity that letter was intended to be given by the court and whatever else may be said about It In connection with our question, 

we think that It carefully limits the terms of the agreed judgment 

in question to reciprocal exchanges, which, the letter says, were 

not rest&ted by any then existing statutes defining the prcperty 

in which reciprocal exchanges might invest their funds. The letter 

then says: 

"As a general proposition, premiums In course 

of collection are valuable credits and therefore 

constitute property in the broadest sense of that 

term. In a broad sense, investments include credits 

or property other than cash; therefore In the present state of the laws, It Is believed that premiums 

in the course of collection are to be regarded 

as tax reducing investments Insofar as reciprocal 

exchanges are concerned, ” 

We believe that this part of the letter Is unsound. The 

views expressed by the above mentioned Attorney General’s Opinion 

No. O-6539, approved June 4, 1945, (after the above mentioned 

case was decided) are sound and are In line with the accepted 

definitions of the terms “Invest” and “investment.” We find no 

support of the “broad” definition of these terms, and, as pointed 

out above, In dealing with a tax statute we are not authorized to 

resort to liberal or broad construction In favor of the person 

or property subject to the tax statute. 

The purpose of the gross receipts tax statute (Art. 7064) 

is to encourage, by offering a lower tax rate, those insurance 

carriers subject to the Act to make investments in Texas securlties and property. Kansas City Title Insurance Co. v. Butler, 

253 S.W.2d 318 (Tex.Clv.App. 1952, error ref. n.r.e.); Eo d of 

Insurance Commissioners v. Prudential Fire Insurance Comply 167 

rW.2d e 578 (Tex.Civ.App. 1942, error ref. n.r.e.). It Is cl;ar that 

this Legislative intent would not be enhanced by Including premium 

notes among the tax reducing investments, and we do not believe 

that they were intended by the Legislature to be included in any 

of the carefully defined types of property listed in the above 

mentioned statutes. 

-1554- 
. 

Honorable J. N. Nutt, page 9 (C-325 ) 

For all of the reasons set out above we have concluded 

that premium notes executed by Texas residents do not constitute 

"Texas Securities" within the meaning of Article 7064, Vernon's 

Civil Statutes. 

SUMMARY --M-w-- 

Premium notes executed by Texas residents 

do not constitute "Texas Securities" within the 

meaning of Article 7064, V.C.S. 

Yours very truly, 

WAGGONER CARR 

Attorney General of Texas 

RER:ss 

APPROVED BY OPINION COMMITTEE: 

W. V. Geppert, Chairman 

Joe R. Long 

James Strock 

Pat Bailey 

Jack Goodman 

APPROVED FOR THE ATTORNEY GENERAL 

BY ROGER TYLER