"P'HEA~~ORNEY GENERAL
OFTEXAS

Honorable 0. P. Lockhart, Chalrman Board of Insurance Commissioners Austin, Texas

Dear Sir: OpinionNo. Q-5255 "' Re: Departmental"practicewith regard to valuation clauses in life insurantie~

policles~~submltted to the Board of Insurance Commissioners.

Your letter requesting the opinion of this department on questions statad therein is as follows:

"I* Texas Comuanies
"Article 4732, Section 7 requires that every policy providing-'non-forfeiture benefFts must contain a clause stating the mortality table and the' interestrate used incomputing the legal-reserves for the policy. Article 4682, Sectlon 3'and'~Article 4688 provLde that the Commissioner or his representative'must compute the legal reserve value of all policies at the end of each year'; In order to domplgwlth thPs requirement, it is also necessary~thatthe valuatlbn clause of any lnsui+ancb policy; whether It contains non-forfeiturevalues or not, state the method of valuation to be -employed (i.e., the full net level method of valuation, the full preliminary term method the modified preliminary term method, e'ccif: In the absence of any statementto the contrary, It will be assumed that the full net level basis ts the method of valuation Intended. 'AlthoughArticle 4732'; Section 7 specifies' no particularmortality table to be used, Article 4688, SectXon 2 by Implication requires that the reserve lfabilitymaintained on account of any policy shallnot be less than the reserve-.computed on the basis of the American Experience Table of Mortalltgwith the interest rate speciffed In the policy if such interest rate is less than four per cent. A further implication that has been-

Honorable 0. P. Lockhart, page 2 O-5255

and is generally acceptedby all Texas companies and by Departmental practice is that the~non-forfeiture values provided in any policy shallnot be less than the non-forfeiturevalues computed on the basis of the American Experience Table of Mortality ana the rate of interest specified in the policywhen such rate is less than fbur per cent. Hence, therewould be no point in any Texas company insertinga valuationclause in any of its policieswhich would specifya mortalitytable that would result In lower reserves than the correspondingAmerican Experience reserves, even though such practicemight not be specificallyprohibitedby law.

"II. Foreign CompaniesDoing Business in Texas "Althoughthe Articles mentioned above as applying to Texas companies are worded in suchmanner as to indicate that they also apply to foreign companiesdoing business in Texans, their appllcation to foreign companies is complicatedby the provisions of Article 4682, Sectlons 3~, 4 and 5 and by Article 4734. In stud ltigthe application ofArticle 4682, Sections 3, t and 5 and Article 4734 to this situation, it iswell to bear inmind two differentpoints of view with regard to the valuatlon of insurancepolicies, First, there is the aggregate~~point of view, from which'the sum total of the amounts of legal reserve maintained on account of each policy in force constitutes the Insurance company's current liability on account of Its insurance in force. This pointof view is Important to the Company In that Itmeasures the amount of securLtie3 it must hold in order to be able to meet its obligationsas they become due on its outstanding Insurancepolicies, This point of iriew1s Important to the policyholde? in-.that the amount of legal reserve held by the companymeasures to a certain extent the ability of the company to meet Its obligationsunder his policy.
"The secondpoint of, view Is the Individual point of view, and Is concerned chieflywith the determination of non-forfeiturebenefits such as dash and loan values, paId up Insurance values, and extended insurance values. This point of view Is Important to the company in that it determines many of the benefits to be granted policyholders, and Is important to the policy owner in that itHonorable 0. P. Lockhart, page 3 O-5255

determines the extent of many of the benefits and privtleges he Is to receive.

"WedesZre your opinionupon the following points: (a)does Artitile4682,~Section5 permit the Commissioner to' accept for 'filingunderArtlcle %749'llfe insurancepolicies issuedby foreign companiesdoing business In this State whlch'contain a valuatlon clause less liberal to the lnsured and more liberal to the company than that required of Texas companies, or does suchArticle merely allow the Commissionerto accept the statement of the commissioner of another State showing the amount of reserves calculated and stating that such reserves have been.calculated In accordances with the Texas Statutes, and (b)does Article 4734 require the Commissionerto accept for filfng in--‘ surancepollcles issued by fbreign companies operating In Texas containinga valuation'clause3pecFfying a valuatlonbasis less liberal to the insured and'more liberal to the company than that required of Texas companieswhen such foreign companies' home State has a law requiring the~~use of such valuation clause by all companies organized under the provisions of its law, and what is the situationwhen such other State ha3 a law similar to Article 4734?”
Article 4732,Vernon'sAnnotated Clvll Statutes, reads in part as follows:

"Nopolfcy of life insurance shallbe issued or delivered in this State, or be Issuedby a life Insurance company organizedunder the laws of this State, unless the same shall contain provIsIons substantiallyas follows: ,I

. . . *

.

“7

. A 'provlslonwtilch, in event of.default in preinium~~

payments, after premiums shall have been pai~dfor three full"year8, shall secure to the owner of the policy a stipulated form-~ofIiisurance, the net value ofwhich shall be at least equal to the reserve at the date of default on the policy, and on any dividend addrtlons thereto, specifying the mortality table and rate of interest adopted for computing sudh reserve, less a sumnot more than two and one-halfper cent of the amount insuredby the policy and of any existingHonorable 0. P. Lockhart, page 4 O-5255

dividend additions thereto, and.less any existing Indebtedness to the company **on** the policy. Such provision Shall stipulatethat the policy may be surrenderedto the company at its home office within one month from date of default for a specified cash value at least equal to the sum which would otherwisebe available for the purchase-'of insurance,as aforesaid; and may stipulate that the companymay defer payment for not more than six months after the application therefor is made. This provision shallnot be required in term insurances. ~.'. v*..A table showing In figures the loan values, and the optionsavailableunder the policies each year, upon default In premiumpayment3 during the first twenty years of the polby or the period during which premiums are payable, beginning with the year in which such value3 and options become available.
"9

. That if';In event of default In premium payments, the value of the policy Shallbe applfed to the purchase of other insurances;and if such insurance Shallbe In force and the originalpolicy shall-shave

not been surrenderedto the'company and canceled, the policy may be reinstatedwithin three years from suchdefault upon evidence.of insurability satisfactoryto the company and payments of arrears of premiumswith Interest.
II I(

. . . . . Article 4734, Vernon's Annotated CivFl Statutes, reads as follows:

"Thepolicies of a life Insurance company not organizedunder the laws of this State may contain any provlslonwhich the law of the State, territory,districtor countyunder which the company IS organized,prescribes Shall be in such policieswhen issued-'in this State; and the policies of a life insurance company organizedunder the laws of this State may, when iSSUed or dellvered-in any other State, territory,district or county, contain any provLsion requlred by the law3 of the State; territory,district or coUntyin which the same are Issued,anything in this chapter to the contrarynotwithstanding."Honorable 0. P. Lockhart, page 5 O-5255

Article 4749, Vernon'sAnnotated Civil Statutes, provides:
"Life insurance companies shall,within five days after the Issuance of, and the placingupon the market, any form of policies of life insurance, file a copy of such form of policy with the InsuranceDepartment."
Article 4682, Vernon's Annotated Clvil,Statutes,provides in part:

"Inaddition to the otherduties required of the Commissioner,he ahall performduties as follows: 0

. . . 0 s

“3 0 Calculatenet value of policies. --He shall, as soon as practicable In eachyear, calculate or cause to be calculated in his officeby an officer or employe of his department, the net value on the thirty-firstday of December of the previousyear of all the policies in force on that day In each life or health insurance companydoing business in the State, upon the basis and in the manner prescrivedby law.

“4

. See that net value of policies are on hand. '--

Having determined the net value of all policies in force, he shall see that the company has in safe securities of the class and character required by the laws of this State the amount of said net value 'of

all its policies, after all itsdebts and claims against it and at least one hundred thousand dollars of surplus to policy holders have been provlded for.

“5 * May accept valuation of other States. -- He may accept the valuationmade by the Insurance commissioner of the Stateunder whose authority a life insurancecompany was organized,when such valuationhas been properlymade on sound and recognizedprinciples, as a legal basis as above, The company shall furnish to him a certificate of the insurancecommissioner of such States, setting forth the value calculated on the data designated above of all the policies in force in the company on the previous thirty-firstday of December, and stating that, after all otherdebt8 ofHonorable 0. P. Lockhart, page 6 O-5255

the company and claims against It at that time, and one hundred thousanddollars surplus to'policy holders,were provided for, the company had, in safe securities of,the character requlred by the laws of this State, an amount equal to the net value of all Its policies in force, and that said company is entitled to do business In its own State.
r, II

. . . . . Generally speaking, It is stated in American Jurlsprudence, volume 29, page 67:

"Modern statutesrequire liisurers to maintain reserves to assure the payment of losses coveredby their policies and the return of unearned premiums. The term 'reserve'or 'reserves' In the law of insurancemeans in general a sum of money variously computed or estimated;which, with accretions from interest, Is set aside, 'reserved,' as a fund with which to mature or liquidate, either by payment or reinsurancewith other companies, futureunaccrued and contingent claims, and claims accrued.

but contingentand indefiniteas to amount or time of payment. Such term has a di8tinCtiVe meaning in respect of life insurancemaintained on the level-premiumbasis. In such situation, the amount of the premium is necessarily greater than the mortality cost during the earlyyears of the insuranceand less than the mortality cost In later years. With the mortality table and an assumed rate of Interest on the investment of premiums received, the amount of the accumulated savings on this basis, at kng date, can be mathematically computed. This amount constitutes the 'reserve'against the policy or its net value. The Insurermust have on hand the aggregate amount of these reserves against its outstanding policies. The reserve against a life insurance policy constitutes the source of itsnonforfeiturevalue upon a lapse In payment of premiums."
Article 4688, Vernon'sAnnotated Civil Statutes, provises:
"The Commissioner,as soon as practicable in eachyear, shall compute the reserve liability on the thirty-firstday ofDecember of the pre-Honorable 0. P. Lockhart, page 7 o-5255

of every company organizedunder the ^.

. . -. ceding year laws of this Jtar;e, or~autnorlzea to transact business in this State, which has outstanding policies of Insurance on the lives of citizens of this State In accordancewith the following rules:
"1

. The net value on the first day ofDecember of the precedingyear of all outstanding policies of life insurance in the company Issued prior to the first day of January, 1910, shall be computed according to the terms of said policies on the basis of the American Experience Table of Mortality,and four and one-halfper cent lnterest per annum,
"2

. The net value on the last day ofDecember, of the precedfngyear, of all policies of life insurance issued after the thirty-firstday ofDecember, 1909,upon the basis of the Actuary's or CombinedExperience Table of Mortality,with four per cent interestper annum. The polld es of any such life Insurance company thereafter issuedupon the reserve bas'isof an interestrate lower than four per cent shall be computedupon the basis of the American ExperienceTable of Mortalitywith interestat such lower rate per annum.

“3 * In every case Inwhich the actual premium charged for an insurance is less than the net premium for such insurance computed accoraing toits respective tables of mortalftg and rate of Interestaforesaid, the company shall also be charged with the value of annuity, the amount of which shall equal the difference between the premium charged and that required by the rules above stated,and the term of which In years shall equal the number of future annual paymentsdue on the Insuranceat the date of the valuation.”

We have been unable to find any’case where the appellate courts of this State OP any other jurisdictionhave passedupon the questions presented in your Inquiry.

It will be noted that under Article 4734, Vernon’s Annotated Civil Statutes, that the policies of foreign life insurance companiesmag contain any provisionswhich the law of the State, territory,district or county under which the company Is organizedprescribes,when such policies are IssuedHonorable 0. P. Lockhart, page 8 o-5255

in this State notwithstandingany contraryprovision contained 'InChapter 3, Title~78,Vernon's Annotated Civil Statutes. Paragraph 5 of Article 4682;Vernon's Annotated Civil Statutes, provldes in effect that the Board of Insurance Cotnmissloners of this State may accept the valuationmade by the Insurance ComnU.ssioner of the State under whose authority the life Insurance companywas organlzed,when such valuation has been properlymade on sound and recognized principles. The foreign company is required to furnish the Board of Insurance Commissionersa certificate of the InsuranceCommissioner of such state. setting forth the value calculated on the data designated of all the pollcles In force inthe~ cdmpany on the previous thirty-firstday of~December,and stating that, after all other debts of the company and claims against it at the time, and one hundred thousanddollars surplus to policy holders,were provided for and the company had in safe securitiesof the character required by the laws of this State, the amount equal to~the net value of all Its policies in force, and that such company is entitled to do business tn its own state.

Considering the foregoing statutes together, IYls our opinion that Section 5 of Article 4682, Vernon's Annotated Clvll Statutes, authorizes the Board of InsuranceCommissioners of this State to accept for flllngunder Article 4749, Vernon's Annotated Civil Statutes, life insurance policies issued by foreign companiesdoing business in this State Which contain the valuation clause less liberal to the insuredand more'liberal to the company than that required of Texa.scompanies,provided, of course, the provisions of Section 5 are compliedwith.

.'It Is our further opinion that Article 4734,~ Vernon's Annotated CIvll Statutes, in connectionwith what has hereto' fore been said in answer to your first question, requires the Board of Insurance Commissionersto accept for flling~life insurancepollcles issuedby a foreign company.operatingin,Texas containing a valuation clause specifyinga valuationbasls.less liberal to the Insured and more liberal to the company than requlred to Texas companieswhen such foreign company's home state has a law requiring the use of such valuation clause by all companies organizedunder the provisions of its laws.

You also asked:
"What is the situationwhen such other state has.a law similar toArticle 3734?"
With reference to this question,hitIs our opinion that although other statesmay have laws similar toArticle 3734, It would notHonorable 0. P. Lockhart, page 9 O-5255

affect our answers to the foregoing questions, insofaras valuation policies of foreign life Insurance companiesdoing busines In this State is concerned.

Yours very truly

ATTORNEY GENEEAL OF TEXAS

By s/ArdellWillii%ms Ardell'Wllllams Assistant
AW:db:wc

APPROVED MAY 18, 1943 s/GroverSellers FIRST ASSISTANT ATTORNEY GEKERAL Approved Opinion CommitteeBy s/EWE Chairman