"P'HEA~~ORNEY GENERAL 

OFTEXAS 

Honorable 0. P. Lockhart, Chalrman 

Board of Insurance Commissioners 

Austin, Texas 

Dear Sir: Opinion No. Q-5255 "' 

Re: Departmental"practice with 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' 

interest rate 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~that the valuatlbn clause of any lnsui+ancb 

policy; whether It contains non-forfeiture values 

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 statement to the contrary, It will 

be assumed that the full net level basis ts the 

method of valuation Intended. 

'Although Article 4732'; Section 7 specifies' 

no particular mortality table to be used, Article 

4688, SectXon 2 by Implication requires that the 

reserve lfability maintained on account of any 

policy shall not be less than the reserve-.computed 

on the basis of the American Experience Table of 

Mortalltg with 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 accepted by all Texas companies 

and by Departmental practice is that the~non-forfeiture values provided in any policy shall not 

be less than the non-forfeiture values computed 

on the basis of the American Experience Table of 

Mortality ana the rate of interest specified in 

the policy when such rate is less than fbur per 

cent. Hence, there would be no point in any Texas 

company inserting a valuationclause in any of its 

policies which would specify a mortalitytable that 

would result In lower reserves than the corresponding American Experience reserves, even though such 

practice might not be specifically prohibited by 

law. 

"II. Foreign Companies Doing Business in Texas 

"Although the Articles mentioned above as applying to Texas companies are worded in such manner as to indicate that they also apply to foreign 

companies doing business in Texans, their appllcation to foreign companies is complicated by the 

provisions of Article 4682, Sectlons 3~, 4 and 5 

and by Article 4734. In stud ltig the application 

of Article 4682, Sections 3, t and 5 and Article 

4734 to this situation, it is well to bear in mind 

two different points of view with regard to the 

valuatlon of insurance policies, 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 It measures the 

amount of securLtie3 it must hold in order to be 

able to meet its obligations as they become due on 

its outstanding Insurance policies, This point of 

iriew 1s Important to the policyholde? in-.that the 

amount of legal reserve held by the company measures 

to a certain extent the ability of the company to 

meet Its obligations under his policy. 

"The second point of, view Is the Individual 

point of view, and Is concerned chiefly with the 

determination of non-forfeiture benefits 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 it 
Honorable 0. P. Lockhart, page 3 O-5255 

determines the extent of many of the benefits and 

privtleges he Is to receive. 

"We desZre your opinion upon the following 

points: (a) does Artitile 4682,~Section 5 permit 

the Commissioner to' accept for 'filing underArtlcle %749'llfe insurance policies issued by foreign 

companies doing 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 such Article 

merely allow the Commissioner to 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 Commissioner to accept for filfng in--‘ 

surance pollcles issued by fbreign companies operating In Texas containing a valuation'clause 3pecFfying a valuatlon basis less liberal to the insured and'more liberal to the company than that 

required of Texas companies when 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 

situation when such other State ha3 a law similar 

to Article 4734?” 

Article 4732, Vernon's Annotated Clvll Statutes, reads 

in part as follows: 

"No polfcy of life insurance shall be issued 

or delivered in this State, or be Issued by a life 

Insurance company organized under the laws of this 

State, unless the same shall contain provIsIons 

substantially as follows: 

,I . . . * . 

“7 . A 'provlslonwtilch, in event of.default 

in preinium~~ payments, after premiums shall have 

been pai~d for three full"year8, shall secure to 

the owner of the policy a stipulated form-~of Iiisurance, the net value of which 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 sum not more than two and one-half per cent of the 

amount insured by the policy and of any existing 
Honorable 0. P. Lockhart, page 4 O-5255 

dividend additions thereto, and. less any existing 

Indebtedness to the company on the policy. Such 

provision Shall stipulate that the policy may be 

surrendered to 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 otherwise be available for the purchase-'of 

insurance, as aforesaid; and may stipulate that 

the company may defer payment for not more than 

six months after the application therefor is made. 

This provision shall not be required in term insurances. 

~.'. v*.. A table showing In figures the loan 

values, and the options available under the policies each year, upon default In premium payment3 

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 Shall be applfed 

to the purchase of other insurances; and if such insurance Shall be In force and the original policy 

shall-shave not been surrendered to the'company 

and canceled, the policy may be reinstated within 

three years from such default upon evidence.of insurability satisfactory to the company and payments of arrears of premiums with Interest. 

II I( . . . . . 

Article 4734, Vernon's Annotated CivFl Statutes, reads 

as follows: 

"The policies of a life Insurance company 

not organized under the laws of this State may 

contain any provlslon which the law of the State, 

territory, districtor county under which the 

company IS organized, prescribes Shall be in such 

policies when issued-'in this State; and the policies of a life insurance company organized under 

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 contrary notwithstanding." 
Honorable 0. P. Lockhart, page 5 O-5255 

Article 4749, Vernon's Annotated Civil Statutes, provides: 

"Life insurance companies shall, within five 

days after the Issuance of, and the placing upon 

the market, any form of policies of life insurance, file a copy of such form of policy with the 

Insurance Department." 

Article 4682, Vernon's Annotated Clvil,Statutes, provides in part: 

"In addition to the other duties required 

of the Commissioner, he ahall perform duties as 

follows: 

0 . . . 0 s 

“3 0 Calculate net value of policies. -- He 

shall, as soon as practicable In each year, calculate or cause to be calculated in his office by 

an officer or employe of his department, the net 

value on the thirty-first day of December of the 

previous year of all the policies in force on that 

day In each life or health insurance company doing 

business in the State, upon the basis and in the 

manner prescrived by 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 its debts 

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 valuation made by the Insurance 

commissioner of the State under whose authority 

a life insurance company was organized, when such 

valuation has been properly made on sound and 

recognized principles, as a legal basis as above, 

The company shall furnish to him a certificate of 

the insurance commissioner 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-first day of December, and stating that, after all other debt8 of 
Honorable 0. P. Lockhart, page 6 O-5255 

the company and claims against It at that time, 

and one hundred thousand dollars 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 statutes require liisurers to maintain reserves to assure the payment of losses 

covered by their policies and the return of unearned premiums. The term 'reserve' or 'reserves' 

In the law of insurance means 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 reinsurance with other companies, 

future unaccrued and contingent claims, and claims 

accrued. but contingent and indefinite as to amount 

or time of payment. Such term has a di8tinCtiVe 

meaning in respect of life insurance maintained on 

the level-premium basis. In such situation, the 

amount of the premium is necessarily greater than 

the mortality cost during the early years of the 

insurance and 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 Insurer must have on hand the aggregate 

amount of these reserves against its outstanding policies. The reserve against a life insurance policy constitutes the source of its nonforfeiture value upon a lapse In payment of 

premiums." 

Article 4688, Vernon's Annotated Civil Statutes, provises: 

"The Commissioner, as soon as practicable 

in each year, shall compute the reserve liability 

on the thirty-first day of December of the pre- 
Honorable 0. P. Lockhart, page 7 o-5255 

of every company organized under 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 accordance with the following 

rules : 

"1 . The net value on the first day of December of the preceding year 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-half per cent lnterest per annum, 

"2 . The net value on the last day of December, of the precedfng year, of all policies of 

life insurance issued after the thirty-first day 

of December, 1909, upon the basis of the Actuary's 

or Combined Experience Table of Mortality, with 

four per cent interest per annum. The polld es 

of any such life Insurance company thereafter 

issued upon the reserve bas'is of an interest rate 

lower than four per cent shall be computed upon 

the basis of the American Experience Table of 

Mortality with interest at such lower rate per 

annum. 

“3 * In every case In which 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 Interest aforesaid, 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 payments due 

on the Insurance at the date of the valuation.” 

We have been unable to find any’ case where the appellate 

courts of this State OP any other jurisdiction have passed upon 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 companies mag contain any provisions which the law 

of the State, territory, district or county under which the 

company Is organized prescribes, when such policies are Issued 
Honorable 0. P. Lockhart, page 8 o-5255 

in this State notwithstanding any contrary provision contained 

'In Chapter 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 valuation made by the 

Insurance ComnU.ssioner of the State under whose authority the 

life Insurance company was organlzed, when such valuation 

has been properly made on sound and recognized principles. 

The foreign company is required to furnish the Board of Insurance Commissioners a certificate of the Insurance Commissioner of such state. setting forth the value calculated on 

the data designated of all the pollcles In force inthe~ cdmpany on the previous thirty-first day of~December, and stating that, after all other debts of the company and claims 

against it at the time, and one hundred thousand dollars surplus to policy holders, were provided for and the company had 

in safe securities of 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 Insurance Commissioners of this State to accept for flllng under Article 4749, 

Vernon's Annotated Civil Statutes, life insurance policies 

issued by foreign companies doing business in this State Which 

contain the valuation clause less liberal to the insured and 

more' liberal to the company than that required of Texa.s companies , provided, of course, the provisions of Section 5 are 

complied with. 

.' It Is our further opinion that Article 4734,~ Vernon's 

Annotated CIvll Statutes, in connection with what has hereto' 

fore been said in answer to your first question, requires the 

Board of Insurance Commissioners to accept for flling~life insurance pollcles issued by a foreign company.operating in,Texas 

containing a valuation clause specifying a valuation basls.less 

liberal to the Insured and more liberal to the company than requlred to Texas companies when such foreign company's home 

state has a law requiring the use of such valuation clause by 

all companies organized under the provisions of its laws. 

You also asked: 

"What is the situation when such other state 

has.a law similar to Article 3734?" 

With reference to this question, hit Is our opinion that although 

other states may have laws similar to Article 3734, It would not 
Honorable 0. P. Lockhart, page 9 O-5255 

affect our answers to the foregoing questions, insofar as valuation policies of foreign life Insurance companies doing 

busines In this State is concerned. 

Yours very truly 

ATTORNEY GENEEAL OF TEXAS 

By s/Ardell Willii%ms 

Ardell'Wllllams 

Assistant 

AW:db:wc 

APPROVED MAY 18, 1943 

s/Grover Sellers 

FIRST ASSISTANT 

ATTORNEY GEKERAL 

Approved Opinion Committee By s/EWE Chairman