Opinion ID: 6261810
Heading Depth: 2
Heading Rank: 2

Heading: determination of assets

Text: We will next determine what items Safeguard may count as assets. The Department contends that Safeguard holds certain assets it is not authorized to hold under the act, which limits the permissible scope of investment by insurers. The Department would classify them as nonadmitted assets, i. e. assets not to be counted in determining solvency. The act contains provisions stating what assets an insurer may and may not hold, but does not say how unauthorized assets are to be treated in determining solvency. We approved the treatment of unauthorized assets as nonadmitted in National L. Ins. Co. of U.S.A. v. Haines, 255 Pa. 599, 100 A. 517 (1917). That case was based on the Act of June 1, 1911, P.L. 567, which has been repealed. The 1911 Act was similar to the present act in that it stated what assets were authorized and unauthorized, §§ 16-18 of the 1911 Act, but did not state how unauthorized assets were to be treated in determining solvency. We hold that unauthorized assets under the present act are to be treated as nonadmitted. This is a reasonable interpretation to give effect to the provisions on authorized assets. Having so held, we must determine whether Safeguard’s questioned assets are authorized. The assets that the Department claims should be nonadmitted include certain shares of stock. There is a dispute as to whether the act allows Safeguard to hold such stock, which Commonwealth Court resolved in favor of Safeguard. Investment by mutual insurers is governed by 40 P.S. § 912, which provides as follows: “No domestic mutual insurance company other than a mutual life insurance company shall invest any of its assets except in accordance with the laws of this Commonwealth relating to the investment of the capital and surplus of domestic stock insurance companies authorized to transact the same class or classes of insurance, and in accordance with the following provisions: “(1) A domestic mutual insurance company, other than a mutual life insurance company, that writes assessable policies, shall invest its assets only in accordance with the laws of this Commonwealth relating to the investment of the capital of domestic stock insurance companies authorized to transact the same class or classes of insurance. “(2) A domestic mutual insurance company, other than a mutual life insurance company, that writes nonassessable policies, shall invest its assets in accordance with the laws of this Commonwealth relating to the investment of the capital of domestic stock insurance companies authorized to transact the same class or classes of insurance, and may invest any of its excess over and above an amount equal to the minimum capital requirements of such stock companies in accordance with the laws of this Commonwealth relating to the investment of the surplus of domestic stock insurance companies authorized to transact the same class or classes of insurance.” (Emphasis added.) Safeguard writes fire and casualty insurance and is, therefore, subject to the investment regulations applicable to stock fire and casualty insurers. The relevant regulations are similar for both types of insurance, although they are contained in different sections of the act. Investments of stock fire insurers are regulated by 40 P.S. §§ 652 and 653. Those of stock casualty insurers are regulated by §§ 722 and 723. The securities in which capital may be invested are enumerated and do not include common stock, §§ 652, 722. Surplus funds may be invested in “stock ... of any solvent corporation. . . . ” §§ 653, 723. Thus, a mutual insurer may invest in stock only if it writes nonassessable policies and has funds in excess of the minimum capital requirement for a stock company writing similar insurance. The minimum capital requirement for a nonassessable stock fire and casualty insurer is $200,000, 40 P.S. § 386. It is not disputed that when Safeguard purchased the stock in question, its policies were nonassessable, meaning that policyholders could not be assessed to cover liabilities. 3 It is also not disputed that it was purchased with funds in excess of required capital. The purchase was, therefore, legal. Safeguard subsequently began writing assessable policies and continues to do so. The question before us is whether it may hold the stock after making such a change. We hold that it may not. The applicable statutory provision requiring divestiture is § 8 of the Amendatory Act of November 27,1968, P.L. 1118, No. 349', which revised § 912 to its present form. The section formerly read: “No domestic mutual insurance company other than a mutual life company shall invest any of its assets except in accordance with the laws of this Commonwealth relating to the investment of assets of domestic stock insurance companies transacting the same kinds of insurance.” The change limits the investments that were formerly permissible for assessable companies. The above cited section of the Amendatory Act provided that: “Mutual insurance companies existing on the date of this Act shall comply with the investment requirements of this Act within three years from the effective date hereof.” (Emphasis added.) Safeguard’s policies were nonassessable at the time of the amendment. The clear statutory language of § 8 of the 1968 Amendments requires that mutual insurance companies in existence on November 27, 1968, the effective date of the Act, comply with the investment requirements of this Act by November 27, 1971, three years after the effective date. Under § 912(1) and (2) of the Insurance Act, supra. There are two different scopes of investment for mutual non-life assessable companies, e. g. § 912(1) and mutual non-life non-assessable insurance companies, e. g. § 912(2). We believe that the clear language of § 8 of the Amendment continues this dichotomy as to scope of investments. Section 8 is a three-year grace period for mutual non-life insurance companies to comply with the new investment requirements established by the 1968 Act for the respective class of companies, i. e. mutual non-life assessable or mutual non-life non-assessable. We find the requirements of § 8 to be applicable to Safeguard. Consequently, its holding of stock after November 27,1971 was improper. The stock will not be admitted as an asset. Another asset that the Department would not admit is a mortgage on a 35.3 acre tract of land in Muhlenberg Township, Berks County, valued at $128,000. The act allows Safeguard to invest in “loans upon improved and unencumbered real estate.” §§ 652, 722. The Department argues that the tract is unimproved because there is no structure on it. That is not required. The tract has electricity and water and sewer service are readily available. The land has been cleared for development. The Commonwealth Court found that under such circumstances, the property can be considered improved for purposes of the Act, since it is readily marketable at an ascertained value. We agree. The mortgage is adequately secured so as to guarantee return of investment. The insurer is protected against the danger that the act is intended to deal with. The mortgage will be admitted as an asset. Safeguard holds two other mortgages on real estate, one of which the Department would classify as nonadmitted in its entirety, and the other as partially nonadmitted because of defaults in repayment of the mortgages and tax delinquencies on the properties. The Department argues that in view of such conditions, the property is not unencumbered and, therefore, not within the permissible scope of investment. The properties in question were not encumbered when Safeguard took mortgages on them. The investments were lawful when made. That led the Commonwealth Court to conclude that Safeguard could lawfully continue to hold the mortgages. We do not agree. The encumbrances on the mortgages take them out of the permissible scope of investment. The fact that they were lawfully acquired does not allow Safeguard to hold them after the change in conditions. The amount in dispute is $10,131.64. This amount is to be deducted from Safeguard’s admitted assets. The Department also would not admit a certain debenture held by Safeguard. The debenture was issued by the C. M. Clark Insurance Agency, a corporation with which Safeguard maintains a relationship; Again, the Department’s argument is based on an allegation of impermissible investment. We find the allegation to be well founded. The debenture was acquired while Safeguard was writing nonassessable policies. While it was writing such policies, Safeguard could invest in “evidence of indebtedness of any solvent corporation.” 40 P.S. §§ 653, 723. It may no longer do so because of the 1968 Amendment, supra. As we said above, Safeguard may not hold an investment that was lawful when made but became impermissible after the amendment. Contrary to the Commonwealth Court’s holding, the debenture will not be admitted as an asset. Another reason given by the Department for not admitting the debenture was that it considered Clark insolvent. Commonwealth Court properly rejected the Department’s finding that certain other certificates of indebtedness issued by Clark constituted a liability. They should not be counted as such because they are payable only from surplus funds. Clark is solvent under this assessment of its liabilities. We have mooted that question as far as the debenture is concerned, but it has a bearing on another disputed asset, i. e. an account receivable from Clark held by Safeguard, based on shared expenses at the business premises which the two companies jointly occupy. This is another asset which the Department would not admit because of Clark’s alleged insolvency, but which must be admitted under our holding.