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 MrrNutt:

Wehave your letter requesting our opinion concerning the interpretation of Article 7064, Vernon's Clvll Statutes. Youstate: "A roperty-casualty companyhas filed a tax return under Article 706[, V.A.T.S andamongIts 'Texas Securities' shownon the tax return the coibany has listed premiumnotes madeby Texas residents." Yourequest our opinion as to,"whether or not premiumnotes executed byTexas residents constitute Texas securities within the meaning of Article 7064, V.A.T.S." Youenclosed with your letter Commlssioner's Order No. 15333 anda copy of twoprior 1etter.s from the Attorney General addressed to your department which deal with premiumnotes.

Your Order No. 15333, dated January 15, 1964, rules that premiumnotes which meet certain standards shall be admitted assets of fire and casualty companies. Theletter dated October 11,1'337, from the Attorney General to the Casualty Insurance Commissioner advised you that an Insurance companymaynot lend money for the purpose of financing premiums on automobile Insurance with such companysince 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 Chairmanof the Board of Insurance Commissioners, advised:

"In arriving at the judgment herein concerned, It was conceded by this Department that reciprocal exchanges maycount premiumsIn course of collection, Including prem$umnotes, In computing andfii$%ax reducing investments." -1547-Honorable J. N. Nutt, page 2 (c-325 ) . . .,

This letter andthe judeent referred to therein will be given more attention below,

Thefirst paragraph of Article 7064, subjects certain Insurance corporations, Including casualty companies, to a tax on the “total gross amountof premiums received on every kind of Insurance or risk written, except premiumsreceived from other

, llcenaed companle8for relnsurance. , ,‘I Thesecond paragraph

of Article 7064, provides for a graduated reduction of the tax rate on gross premiumreceipts. Underthis 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 amountthat It had Invested on said date In slmll,ar securltles In the State In which It hadIts highest percentage of admitted assets Invested.

. , .’ Thethird 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 nowor mayhereafter be constituted or organized andauthorized 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 andloss reserves as maybe 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 nowengaged; In any other property In thla State In which by 1st~such Insurance. carriers mayInvest their funds. It Is clear that premiumnotes donot 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 byTexas residents constitute “other property in this state In which by law such Insurance carriers may,lnvest their funds.”

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a.. .: . .,.. . . ..I.

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Honorable J. N. Nutt, page 

### 3 (C-325)

Oursearch 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: 'NOcompanyexcept any writing life, health,

and accident Insurance, organized under the laws of this state, shall Invest Its funds over and above Its minimumcapital and Its minimumsurplus, 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 minimumcapital andIts minimumsurplus 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 anyof the States of the United States or In the stock of anyNational Bank, In stock of any State Bankof Texas whose deposits are Insured b the Federal beposlt Insurance Corporation;

. . . etc.

PI 

### “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 amountloaned thereo?; 

### "7
. In Interest-bearing notes or bonds of The Unlverslty.6f Texas Issued under andby 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 andevidences of lndebtedness as deflned and limited bySection 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, 

### 46thLegislature; In Insured or guaranteed obligations as authorized In Chapter 230, page 

### 315,Acts 1945, 49th Legislature; In bonds Issued under the .provlslons authorized bySection 9, Chapter 231 Et@ page 

### 774,Acts 1933, 43rd Legislature;

- * -- Article 

### 2.08,referred to above in Article 2.10, reads as follows:

“Theminimumcapital stock andminimumsurplus

of any such Insurance company, except anywriting life, health andaccident Insurance shall, following Incorporation andgranting of certlflc,ate of ’ Wthorlty;’ ) consist only of the following:

“1, Lawful moneyof the United States; or

“2. Bonds of this state; or 

### "3
. %nds or other evidences of Indebtedness of the United States of America or anyof Its agencies whensuch obligations are guaranteed as to principal andInterest 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 paymentof which notes Is Insured, In whole or In part, by the United States of America o,rany of Its agencies, provided that

..i

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. .* ,’ ,. .,. .o.Honorable J. N. Nutt, Page 

### 5 (C-325)

such Investments In such notes shall not exceed one-half (l/2) of the minimumcapital stock andminimumsurplus of lnvestlng'company; or 

### “5

. Bonds or other Interest-bearing evidences of Indebtedness of any counties, cities or other munlclpalltles of this state.

. . .' Bythe 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 byUnited 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 andnotes on University of Texas admlnlstratlon and library buildings;



### 6. Article 6795b-1, V.C.S., bonds on causeway bridges and tunnels In CiulfCoast countries;



### 7. Article 7880-lga,'V.C.S., bonds Issued byWater Control andImprovement Districts andmunicipal 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 byJimWellsDuval Counties Conservation and Reclamation District;

12. Article 8280-139, V.C.S., bonds Issued byEastland CountyWater Supply pistrict.

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Honorable J. N. Nutt, page 

### 6 (C-325)

Wefind noother 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.

Fromthese statutes It Is obvious that the basic purpose of the Legislature In providing for Investments by Insurance companies wasto provide a high degree of liquidity and safety. Apremiumnote signed by a policyholder may or maynot 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 atax statute, andweare not authorized to resort to liberal con= u-in extending Its exceptions. All doubts are resolved against the exemption. of Longview v. Markham-McNeeMemorial Hospital 

### 137Tex 

### S.. ) .w.2 94, the S&em: Cobt said: 

### 5i W2d 

### 13;%%i

.

"Exemptions from taxation are regarded not only as In derogation of sovereign authority, but of commonrl ht as well. Theymust be strictly construed, &id?i?it?%nded beyond the express requirements of the language used,

. . .' (Emphasis theirs) Afurther 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 ownterms 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 ownedby Insurance carriers." Wethink the presence of the word "Invest" Is slgnlflcant. Aclosely related question wasanswered by the Attorney General In Opinion No. O-6539, approved June 4, 1945. In that opinion, It washeld that furniture andfixtures belonging to a fire Insurance companydid 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." Numerousdefinitions of the term were there quoted. A typical definition Is that which the opinion quotes from In Re Pennocks Will, 

### 35N.E.2d 

### 177,285N.Y. 

### 475,as follows: -

"An 'Investment' is generally deflned as the conversion of moneyor circulating capital into

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

somespecies of property from which an Income or profit Is expected to be derived In the ordinary course of trade or business." Theopinion holds that the terms "Invest" and "Investments" are used In Article 7064 In their ordinary connotation. Wesee nothing In the statutes above quoted that would justify any other construction of the terms. The fact that an Insurance companymay legally purchase andowntypewriters or office supplies does not meanthat these are tax reducing Investments. Similarly, the fact that the company, as anIncident to doing business, mayextend credit upon an open account or open note does not meanthat It has madea tax reducing Investment within the meaningof the statute. Under the above mentioned statutes the only kind of a note In whlqh anInsurance companymayInvest Its funds Is a secured note. Indeed, It maybe said that If pm notes were construed to be Investments at all, It would put the companyIn aposltlon of having Invested Its funds In a mannerviolative of Article 2.10 of the Insurance Code.

In Lumberman'sInsurance Companyv. 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 hadbeen In exlstance less than five years prior to the investment as required by Subdivision 5of Article 2.10. Thetrial court held the Investment to be unlawful, thus rendering the companyInsolvent and subject to the receivership. 'This decision demonstrates the reluctance of the courts to liberalize this particular tax statute. Thecase of Boardof Insurance Commissioners v. Hlghwan Insurance Underwriters, lb9 S.W.2d 541 (Tex.Clv.App. 1943) mayappear 20 tave lmpllcatlons contrary to the conclusion we have reacneo, but webelieve there Is no conflict. Asthe opinion there specifically points out, the trial court hadentered a consent judgment holding, amongother things, that premiumnotes were taxreducing Investments of reciprocal and Inter-insurance exchanges. The trial court also ,held In favor nf lntervenors, Insurance carriers other than those in whosefavor the agreed judgment hadbeen entered. Onappeal 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. TheCourt 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 wasnot called upon to

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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 hadbeen written after the trial court hadentered the agreed judgment. Whatever dignity that letter wasintended to be given by the court andwhatever else may be said about It In connection with our question, wethink 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. Theletter then says: "As ageneral proposition, premiumsIn course

of collection are valuable credits andtherefore 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, ” Webelieve 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.” Wefind no support of the “broad” definition of these terms, and, as pointed out above, In dealing with a tax statute weare not authorized to resort to liberal or broad construction In favor of the person or property subject to the tax statute.

Thepurpose 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 makeinvestments in Texas securlties andproperty. 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 

### 578 (Tex.Civ.App. 1942, error ref. n.r.e.). It Is cl;ar that e this Legislative intent would not be enhanced by Including premium notes amongthe tax reducing investments, andwedonot 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.

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

For all of the reasons set out above wehave concluded that premiumnotes executed byTexas residents donot constitute "Texas Securities" within the meaning of Article 7064, Vernon's Civil Statutes.
SUMMARY --M-w--
Premiumnotes 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

BYOPINIONCOMMITTEE: W.V. Geppert, Chairman Joe R. Long James Strock Pat Bailey Jack Goodman APPROVED

FORTHEATTORNEY

GENERAL BYROGER

TYLER