                                October   5, 1964


Honorable J. N. Nutt                          Opinion No. C-325
Commissioner of Insurance
State Bard of Insurance                       He:   Whether premium
Austin, Texas                                       notes executed by
                                                    Texas residents
                                                    constitute   "Texas
                                                    Securities"   within
                                                    the meaning of Art.
                                                    7064, V.C.S.
Dear Mrr Nutt:
          We have your letter      requesting our opinion concerning the
interpretation     of Article 7064, Vernon's Clvll Statutes.        You state:
 "A roperty-casualty      company has filed a tax return under Article
706[, V.A.T.S        and among Its 'Texas Securities'    shown on the tax
return the coibany has listed        premium notes made by Texas residents."
You request our opinion as to,"whether         or not premium notes executed
by Texas residents      constitute   Texas securities  within the meaning
of Article     7064, V.A.T.S."     You enclosed with your letter    Commls-
sioner's    Order No. 15333 and a copy of two prior        1etter.s from the
Attorney General addressed to your department which deal with
premium notes.
          Your Order No. 15333, dated January 15, 1964, rules that
premium notes which meet certain standards shall be admitted
assets of fire and casualty companies.     The letter  dated October
11,1'337,   from the Attorney General to the Casualty Insurance
Commissioner advised you that an Insurance company may not lend
money for the purpose of financing    premiums on automobile Insurance
with such company since the lending of money, for such purpose would
not be a proper Investment of the funds of such company. The
Attorney General's   letter  of August 6, 1938, addressed to the
Chairman of the Board of Insurance Commissioners, advised:
               "In arriving at the judgment herein concerned,         It
         was conceded by this Department that reciprocal
         exchanges may count premiums In course of collection,
         Including prem$um notes, In computing and fii$%ax
         reducing investments."
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    Honorable   J. N. Nutt,   page 2 (c-325 )


    This letter   and the judeent    referred     to therein          will   be given
    more attention   below,
              The first paragraph of Article      7064, subjects    certain
    Insurance corporations,     Including casualty companies, to a tax on
    the “total gross amount of premiums received on every kind of
    Insurance or risk written,      except premiums received     from other
,   llcenaed companle 8 for relnsurance.       , ,‘I The second paragraph
    of Article   7064, provides for a graduated reduction        of the tax
    rate on gross premium receipts.        Under this 9rovlalo~     the tax rate’
    of the Insurance organization       Is tied to”th@ amount that It had
    Invested on the 31st of December, preceding,         In Texas Securities
    as defined herein, and the amount that It had Invested on said
    date In slmll,ar securltles     In the State In which It had Its highest
    percentage of admitted assets Invested.         . , .’ The third para-
    graph of said Article    reads as follows:
                    “For the purposes of this Act, Texas securities
             are defined as real. estate In this State; bonds of the
             State of Texas; bonds.or interest         bearing warrants of any
             county, city,    town, school district       or any munlclpallt~
             or subdivision     thereof which Is now or may hereafter
             be constituted     or organized and authorized        to issues
           . bonds or warrants underthe        Conetitutlon     and laws of
             this State; notes or bonds secured by mortgage or trust
             deed on property In this State Insured by the Federal
             Housing Administrator;      the cash deposits      In regularly
             established    national or state banks or trust companies
             In this State on the basis of average monthly balances
             throughout the calendar year; that percentage of such
             Insurance company’s Investments in the bonds of the
             United States of America, that Its Texas reserves for
             the unearned premiums and loss reserves as may be
             requlred by the Board of Insurance Conznissloners,
             are of its total reserves;       but’thls    provision   shall
             apply only to United States Qovernment bonds purchased
             between December 8, 1941, and the termination            of the
             war In which the United States Is now engaged; In any
             other property In thla State In which by 1st~ such
             Insurance. carriers     may Invest their funds.
              It Is clear that premium notes do not come within any of
    the.types   of property enumerated by this statute except, poss,lbly,
    the last type.     Hence, the question Is reduced to whether premium
    notes executed by Texas residents     constitute “other property in this
    state In which by law such Insurance carriers     may,lnvest their funds.”




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Honorable    J. N. Nutt,   page 3 (C-325 )


Our search for a complete      list   of such legal    Investments    produces
the following results:
         Article    2.10 of the Texas Insurance       Code reads,    In part,
as follows:
                   'NO company except any writing life,   health,
            and accident Insurance,   organized  under  the laws
            of this state,   shall Invest Its funds over and
            above Its minimum capital and Its minimum surplus,
            as provided In Article   2.02, except as otherwise
            provided In this Code, In any other manner than as
            follows:
                 "1 . As provided for the Investment of Its
            minimum capital and Its minimum surplus In Article
            2.08;
                  "2 . In bonds or other evidences of debt which                 ,
            at the time of purchase are Interest-bearing    and are
            Issued by authority of law and are not In default as
            to principal   or Interest, of any of the States of the
            United States or In the stock of any National Bank,
            In stock of any State Bank of Texas whose deposits
            are Insured b the Federal beposlt Insurance Corpora-
            tion;   . . . PIetc.
                 “3. In bonds or first  liens or first        mortgages   upon
            unencumbered real estate . . . &&CL7
                 "4 . In bonds or other Interest-bearing    evidences
            or debt of any county, municipality,   road district,
            . . . @cJ
                   “5. In the stocks, bonds, debentures, bills   of
            exchange or other commercial notes or bills  and
            securities  of any solvent dividend paying corporation
            . . . @tcJ
                   “6. In loans upon the pledge of any mortgage,
            stock, bonds or other evidence of Indebtedness
            acceptable   as Investments under the terms of this
            Article,   If the current value of such mortgage,
            stock, bonds or other evidence of indebtedness    Is
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Honorable     J. N. Nutt,         page 4 (C-325)


           at least twenty-flve   per cent               (25s)   more than the
           amount loaned thereo?;
                 "7. In Interest-bearing   notes or bonds of The
           Unlverslty.6f   Texas Issued under and by virtue of
           Chapter 40, Acts of the 43rd Legislature,    Second
           Called Session;
                 "8. In real estate              to the extent        only as else-
            where authorized by this             Code;
                 “9 . In Insured accounts and evidences of lndebt-
           edness as deflned and limited by Section 1, Chapter
           618, page 13.56, Acts of the 57th Legislature;    In
           shares or share accounts as authorized In Section 1,
           page 76, Acts 1939, 46th Legislature;    In Insured or
           guaranteed obligations   as authorized In Chapter 230,
           page 315, Acts 1945, 49th Legislature;    In bonds
           Issued under the .provlslons  authorized by Section 9,
           Chapter 231 page 774, Acts 1933, 43rd Legislature;
            - * -- Et@
            Article       2.08, referred       to above in Article           2.10,   reads as
follows:
                  “The minimum capital  stock and minimum surplus
            of any such Insurance company, except any writing
            life,  health and accident Insurance shall,  following
            Incorporation  and granting of certlflc,ate of’ Wthorlty;’                       )
            consist only of the following:
                  “1 ,         Lawful money of the United States;              or
                  “2.          Bonds of this    state;    or
                  "3. %nds or other evidences of Indebtedness
            of the United States of America or any of Its
            agencies when such obligations   are guaranteed as
            to principal and Interest   by the United States of
            America; or
                  "4. Notes secured by first mortgages upon
            unencumbered real estate In this state,   the title
            to which Is valid, and the payment of which notes Is
            Insured, In whole or In part, by the United States
            of America o,r any of Its agencies, provided that
                       ..i




                                                -1550-
                      .   ..       I.   .           .* ,’               ,.             .,.   .o.
Honorable         J. N. Nutt,     Page 5 (C-325 )


            such Investments In such notes shall not
            exceed one-half  (l/2) of the minimum capital  stock
            and minimum surplus of lnvestlng'company;   or

                  “5. Bonds or other Interest-bearing                       evidences
            of Indebtedness of any counties,    cities                    or other
            munlclpalltles  of this state.   . . .'
         By the following statutes   the respective types of property
are declared to be authorized   Investments for Insurance companies.
            1.      Article     842a,   V.C.S.,      securities        Issued   by Federal
agencies;
            2.  Article 842a-1, V.C.S.,                  obligations      wholly    or partially
Insured     by United States or state;

            3.      Article 1187a,         V.C.S.,     bonds on bridges          over navigable
waters;
         4. Article             1269k-1,     V.C.S.,        housing authority       bonds
and obligation;

        5. Article 2603d, V.C.S., bonds and notes                               on University
of Texas admlnlstratlon and library buildings;
             6.  Article 6795b-1, V.C.S.,                   bonds on causeway bridges           and
tunnels      In Ciulf Coast countries;
            Article
             7.      7880-lga,'V.C.S.,   bonds Issued                           by Water Control
and Improvement Districts   and municipal districts;
             8.     Article     8280-133,     V.C.S.,        bonds Issued       by Sablne River
authority;

       9. Article   8280-134,                  V.C.S.,       bonds Issued       by Lower Nueces
River Water Supply District;
       10.    Article 8280-137,                 V.C.S.,       bonds Issued       by Colorado
River Municipal Water District;
       11.    Article 8280-138, V.C.S., bonds lssukd by Jim Wells-
Duval Counties Conservation and Reclamation District;
       12.   Article 8280-139,                    V.C.S.,     bonds Issued       by Eastland
County Water Supply pistrict.




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Honorable    J. N. Nutt,   page 6 (C-325 )


          We find no other statutes   which deal with Investments by
casualty Insurance companies.      There are other statutes which deal
specially  with Investments by other types of Insurance companies,
such as life,    mutual and fraternal  Insurance companies, but they
are not pertinent to your lnqulry.
         From these statutes   It Is obvious that the basic purpose
of the Legislature  In providing   for Investments by Insurance
companies was to provide a high degree of liquidity     and safety.
A premium note signed by a policyholder     may or may not be collec-
tible and, in our opinion,   would not be an Investment of the type
contemplated by these statutes.
          Article   7064, which established    a tax rate and provides
for tax-reducing      Investments, Is a tax statute,    and we are not
authorized    to resort to liberal   con= u-in          extending Its
exceptions.      All doubts are resolved    against the exemption.
of Longview v. Markham-McNee Memorial Hospital          137 Tex
  .w.2
S..                                                 5 i W 2d 13;)%%i        .
94, the S&em:       Cobt    said:
               "Exemptions from taxation are regarded not only
         as In derogation of sovereign authority,     but of
         common rl ht as well.    They must be strictly   construed,
         &id?i?it?%nded    beyond the express requirements of
         the language used,   . . .'   (Emphasis theirs)
           A further argument In favor of our conclusion         Is found
In the language used in Article        7064.    The "other property"
provision    of this article    Is strictly   limited by its own terms
to "property In this state In which by law insurance carriers             may
Invest their funds."       It Is noteworthy that the Legislature        dld
not say "other property which may be legally          owned by Insurance
carriers."      We think the presence of the word "Invest" Is slgnlfl-
cant.    A closely related question was answered by the Attorney
General In Opinion No. O-6539, approved June 4, 1945.             In that
opinion,    It was held that furniture      and fixtures   belonging to a
fire Insurance company did not come within the definition             of a
tax reducing Investments set out In Article 7064.            That opinion
concerned the construction       of the meaning of the word "lnvest-
merit."    Numerous definitions    of the term were there quoted.        A
typical    definition   Is that which the opinion quotes from In Re
Pennocks Will, 35 N.E.2d 177, 285 N.Y. 475, as follows:             -
                  "An 'Investment' is generally   deflned       as the
            conversion of money or circulating    capital       into




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Honorable    J. N. Nutt, Page 7 (C-325 )


            some species of property from which an Income or
            profit Is expected to be derived In the ordinary
            course of trade or business."
          The opinion holds that the terms "Invest" and "Investments"
are used In Article    7064 In their ordinary connotation.      We see
nothing In the statutes above quoted that would justify        any other
construction    of the terms.  The fact that an Insurance company may
legally   purchase and own typewriters   or office  supplies does not
mean that these are tax reducing Investments.       Similarly,   the fact
that the company, as an Incident to doing business,       may extend
credit upon an open account or open note does not mean that It
has made a tax reducing Investment within the meaning of the
statute.     Under the above mentioned statutes the only kind of a
note In whlqh an Insurance company may Invest Its funds Is a secured
note.    Indeed, It may be said that If pm         notes were construed
to be Investments at all, It would put the company In a posltlon
of having Invested Its funds In a manner violative       of Article   2.10
of the Insurance Code.
          In Lumberman's Insurance Company v. State of Texas, 364
S.W.2d 429 (Tex.Clv.App.     1963, error ref. n.r.e.),     the company
Invested funds In the stock of a corporation         which had been In
exlstance   less than five years prior to the investment as required
by Subdivision   5 of Article   2.10.    The trial court held the
Investment to be unlawful, thus rendering the company Insolvent
and subject to the receivership.       'This decision demonstrates the
reluctance   of the courts to liberalize     this particular   tax
statute.
            The case of Board of Insurance Commissioners v. Hlghwan
 Insurance Underwriters,       lb9 S.W.2d 541 (Tex.Clv.App.    1943) may appear
20 tave lmpllcatlons       contrary to the conclusion we have reacneo,
 but we believe there Is no conflict.         As the opinion there
 specifically     points out, the trial    court had entered a consent
 judgment holding,      among other things,   that premium notes were tax-
 reducing Investments of reciprocal        and Inter-insurance    exchanges.
 The trial court also ,held In favor nf lntervenors,         Insurance carriers
 other than those in whose favor the agreed judgment had been entered.
 On appeal from the judgment In favor of the lntervenors           the question
'was raised as to whether this was a,class         action judgment which
 Inured to the benefit of other Insurance carriers,          Including the
 appellees.      The Court of Civil Appeals held that It was a class
 action,    afflrmlng   the trial court judgment on this point, but
 reversing     It on other grounds.     The Court was not called upon to




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Honorable    J. N. Nutt,   page 8 (c-325 )


pass upon the correctness
                 . .        of the terms of the agreed a.judgment.
                                                             - .
The Court quoted In its entlrety     the Attorney tieneral's letter
dated August 6, 1938, referred     to above, which had been written
after the trial court had entered the agreed judgment.       Whatever
dignity  that letter  was intended to be given by the court and what-
ever else may be said about It In connection with our question,
we think that It carefully    limits the terms of the agreed judgment
in question to reciprocal    exchanges, which, the letter says, were
not rest&ted     by any then existing   statutes defining the prcperty
in which reciprocal   exchanges might invest their funds.     The letter
then says:
                   "As   a general proposition,   premiums In course
            of collection     are valuable credits and therefore
            constitute     property in the broadest sense of that
            term.      In a broad sense, investments include credits
            or property other than cash; therefore       In the pre-
            sent state of the laws, It Is believed that premiums
            in the course of collection       are to be regarded
            as tax reducing investments Insofar as reciprocal
            exchanges are concerned, ”
           We believe that this part of the letter   Is unsound.   The
views expressed by the above mentioned Attorney General’s Opinion
No. O-6539, approved June 4, 1945, (after the above mentioned
case was decided) are sound and are In line with the accepted
definitions    of the terms “Invest” and “investment.”    We find no
support of the “broad” definition      of these terms, and, as pointed
out above, In dealing with a tax statute we are not authorized to
resort to liberal     or broad construction  In favor of the person
or property subject to the tax statute.
          The purpose of the gross receipts   tax statute (Art. 7064)
is to encourage, by offering     a lower tax rate, those insurance
carriers   subject to the Act to make investments in Texas securl-
ties and property.      Kansas City Title Insurance Co. v. Butler,
253 S.W.2d 318 (Tex.Clv.App.     1952, error ref. n.r.e.);    Eo d of
Insurance   Commissioners v. Prudential Fire Insurance Comply         167
rW.2d
  e      578 (Tex.Civ.App.   1942, error ref. n.r.e.).     It Is cl;ar that
this Legislative    intent would not be enhanced by Including premium
notes among the tax reducing investments,      and we do not believe
that they were intended by the Legislature      to be included in any
of the carefully    defined types of property listed in the above
mentioned statutes.




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Honorable   J. N. Nutt,   page 9 (C-325   )


        For all of the reasons set out above we have concluded
that premium notes executed by Texas residents   do not constitute
"Texas Securities" within the meaning of Article   7064, Vernon's
Civil Statutes.

                                 SUMMARY
                                 --M-w--

              Premium notes executed by Texas residents
         do not constitute  "Texas Securities" within the
         meaning of Article  7064, V.C.S.

                                     Yours very truly,
                                     WAGGONER CARR
                                     Attorney General of Texas




RER:ss
APPROVEDBY OPINION COMMITTEE:
W. V. Geppert,   Chairman
Joe R. Long
James Strock
Pat Bailey
Jack Goodman
APPROVEDFOR THE ATTORNEY
                       GENERAL
BY ROGERTYLER
