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# TIIE ATIVB~EY GENEKAL

~PTE~As

Hon. William **A.** Harrison Commissioner. of **lamrance~** State Board ofIusurance 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 ofa 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:

**ATexas 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 meetsthe requirements offsection 4.ofArticle **3.39,** ofthe Iasuraace~Code **to** make the 8tocks legd investments as the corporationaare;aat.five ~years old. The common stocks ofeacbd tbeeetwenty incorporated variety etores are .wbolly :ewned~bya.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~tockat 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 ofHon. 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 inthe raid preferred stock certificates.
“Does the inveatmcnt ofthe clubaidiary corporation variety rtore’r stocks, together with the repur,- chase agreement executed by the parent corporation, conetituti an investment within the authority ofArticle 3.39, Section 4, ofthe **lmurance** Code, inthe

‘securities’ ofthe 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 TeicaaInsurance Code, a portion of which reads as follows:
“A life insurance company organized under the law dfthie State may **invest** in or loan uponthe following securities, and none other, viz.

“4

. . . . the capital **rtock,** bonds, bills of exchange and/or commercial notes for billa and securities ofany solvent corporation which ha.9not defaulted in the.payment ofany debt within five years next preceding such investment, or ofany solvent corporation which has not been in existence for five consecutive years next preceding such inveetment’provided such torpor ationhas succeeded to the budness andaosete and has assumed the,liabilities of another corpor.ation, which corporation andthe corporation 60 rucceeded have not defaulted in the payment of.any debt within five years next preceding such investment

. . .I’
Itmay be Seen that since 1909 the Legislature ofTexas has regulated the investments ofthe funda oflife insurance companies organized under the laws ofTexas as a separate, distinct, andexclusive .field of legislation. The laws thereon have been special and restricted, Succeeding session8 ofthe Legislature have surrounded these companies with particular and specific regulations.

In 1951, the 52nd Legislature of Tewe brought forward, whatwas thenthe old Article 4725, andplaced it, without subrtantialHon. William A. Harrison. page 3 (WW-435).
change, into the Insurance Code ofthe State of Texas under its new number 3.39, portions ofwhich are quotedabove. 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. InAttorney General’s Opinion No. WW-293-A, the position ofthe department was thus stated:

“A life insurance company cannot invest its capital, surplus and contingency reserves in the stock or commercial notes ofany company which has notbeen in existence for a period offive years next preceding the date of such investment.”
Thus the present problem resolves itself downto whether or not a guaranty or warranty agreement by a parent corporation may override the otherwise clear requirements ofthe legislative mandate. This department has likewise expressed itself regarding the above qualification under a pevioue administration in Attorney General Gpinion No. )-3015, inwhich was stated:

“Itwould thus be seen a security to be eligible for either class (speaking oflife insurance corporations under 4725 andinsurance corporations other than life under 4706) ofthese Texas corporations must be the direct obligation ofthe issuing corporation. The statutory definition ofeligible securities excludes, therefore, stocks or shares evidencing merely participating interests by the holders in the netprofits, if any, of the issuing concern.” The position ofthis 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 thanthose prescribed by statute, andindirect evasion of such statutes, as by the medium of a subsidiary, will notbe permitted

. . . . “While an insurance company has implied power to make investments of its capital, and in the absence oflegislative 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 theHon. William A. Harrison, page 4 (WW-435)

State to provide specifically howthe funds ofinsurance companies shall be invested. Inapplying such statutes, no interpretation of aword, phrase, or sentence contained ina comprehensive investment code should be made without reference to the scheme ofthe entire code

. . . .‘I 44 C.J.S. atpage 632.
Itthus appears that the agreement by the parent corporationwith the investing insurance company by way of a rt-purchase agreement does not overcome the inability ofthe subsidiary company to meet the requirements ofArticle 3.39 so as to make the investment legal, withinthe strict bounds of the legislative enactment. It would appear that any other construction of this portion ofthe **statute** would be an undueexpansion and clearly subvert the intention ofthe 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 notthe securities ofthe parent corporation. Thus, we conclude thatthe investments are merely invtetments in the stocks ofthe 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