2O.!,c: 

TIIE ATIVB~EY GENEKAL 

~PTE~As 

Hon. William A. Harrison 

Commissioner. of lamrance~ 

State Board of Iusurance 

Austin 14, Texas 

Dear Mr. Harrima: 

c+hxLHo..ww-435 

Re:. Ar&::3.39; ~&tion 4, 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 

iasuraace company. 

‘Wes&modebge.reciipr.~ your3etteroi~ar~h n,l9gg, requesting 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 iacorporated. These variety store corporatioue;o.not~Sn and of 

themselves meets the requirements offsection 4 .of Article 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 operations 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~tock at a purchase 

price equal to the .redemption .price specified in the preferred stock certificates. The store-company further 

agreed that in the event the variety stores failed to declare 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 redemption price specified in the raid preferred stock 

certificates. 

“Does the inveatmcnt of the clubaidiary corporation variety rtore’r stocks, together with the repur,- 

chase agreement executed by the parent corporation, 

conetituti an investment within the authority of Article 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, Section 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 following 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.payment 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 preceding 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 companies organized under the laws of Texas as a separate, distinct, 

and exclusive .field of legislation. The laws thereon have been special 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 companies. 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 Gpinion 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 statutory definition of eligible securities excludes, therefore, 

stocks or shares evidencing merely participating interests by the holders in the net profits, if any, of the issuing 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 statute, 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 contained 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 corporation 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 investment 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 corporation. 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 investments for a Texas insurance company. 

CDD:ls 

APPROVED: 

OPINION COMMITTEE: 

Geo. P. Blackburn, Chairman 

Mary K. Wall 

.I. Milton Richardson 

Fred B. Werkenthin 

Very truly yours, 

WILL WILSON 

i;rnmzs 

C. Dean Davis 

Assistant 

REVIEWED FOR THE ATTORNEY GENERAL 

BY: W. V. Geppert