                                                                      2O.!,c:
            TIIE ATIVB~EY                   GENEKAL
                             ~PTE~As




Hon. William A. Harrison            c+hxLHo..ww-435
Commissioner. of lamrance~
State Board of Iusurance            Re:. Ar&::3.39;     ~&tion 4, Texas
Austin 14, Texas                         xa8rYaacc.c~      xnveemeats
                                         by a life i~eurance ,company in
                                         the rtocka of a subsidiary
                                         carporati~@th      aa agreement
                                         pUaa!~by@e.pu,ent     corporation
                                         to buy. wx.& stocks from the
Dear Mr. Harrima:                        iasuraace company.

            ‘Wes&modebge.reciipr.~     your3etteroi~ar~h    n,l9gg,  re-
questing an opiaiqa from tbis~department upoa+a:grwation arising from
tbe following facts:

             **A Texas life inguraace compauy owns and holds
      54OQ.000 in the preferred stocks of .tv&ty.acparate
     ‘and distinct variety atores whichhavebeen      iacorpora-
      ted. These variety store corporatioue;o.not~Sn      and of
      themselves meets the requirements offsection 4 .of Arti-
      cle 3.39, of the Iasuraace~Code to make the 8tocks legd
      investments as the corporationaare;aat.five     ~years old.
      The common stocks of eacbd       tbeeetwenty incorporated
      variety etores are .wbolly :ewned~by a. larger ~corporated
      store company~ The atore company directa the opera-
      tions 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 pre-
      ferred stock certificates.   The store-company further
      agreed that in the event the variety stores failed to de-
      clare 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 of
Hon. William A. Harriaon, page 2 (WW-435).


      the outstanding, and redeemed preferred stock of the
      variety stores for a purchase price equal to the re-
      demption price specified in the raid preferred stock
      certificates.

             “Does the inveatmcnt of the clubaidiary corpora-
      tion variety rtore’r stocks, together with the repur,-
      chase agreement executed by the parent corporation,
      conetituti an investment within the authority of Arti-
      cle 3.39, Section 4, of the lmurance  Code, in the
      ‘securities’ of the parent corporation?”

              The applicable cltatutory proviajdn drawn in question by
the above fact situation, and applicable thereto, is Article 3.39, Sec-
tion 4, of, the Teicaa Insurance Code, a portion of which reads as
follows:

             “A life insurance company organized under the
      law df thie State may invest in or loan upon the follow-
      ing securities, and none other, viz.

              “4 . . . . the capital rtock, bonds, bills of exchange
      and/or commercial notes for billa and securities of any
      solvent corporation which ha.9 not defaulted in the.pay-
      ment of any debt within five years next preceding such
      investment, or of any solvent corporation which has not
      been in existence for five consecutive years next pre-
      ceding such inve etment’pr ovided such torpor ation has
      succeeded to the budness and aosete and has assumed
      the, liabilities of another corpor.ation, which corporation
      and the corporation 60 rucceeded have not defaulted in
      the payment of.any debt within five years next preceding
      such investment . . .I’

             It may be Seen that since 1909 the Legislature of Texas
has regulated the investments of the funda of life insurance com-
panies organized under the laws of Texas as a separate, distinct,
and exclusive .field of legislation. The laws thereon have been spe-
cial and restricted,   Succeeding session8 of the Legislature have
surrounded these companies with particular and specific regulations.

           In 1951, the 52nd Legislature of Tewe brought forward,
what was then the old Article 4725, and placed it, without subrtantial
Hon. William A. Harrison.   page 3 (WW-435).


change, into the Insurance Code of the State of Texas under its new
number 3.39, portions of which are quoted above. This department
has had occasion to state its position with regard to Article 3.39,
Section 4, involving the investments of Texas life insurance com-
panies. In Attorney General’s Opinion No. WW-293-A,      the position
of the department was thus stated:

             “A life insurance company cannot invest its
      capital, surplus and contingency reserves in the
      stock or commercial notes of any company which
      has not been in existence for a period of five years
      next preceding the date of such investment.”

             Thus the present problem resolves itself down to whether
or not a guaranty or warranty agreement by a parent corporation may
override the otherwise clear requirements of the legislative mandate.
This department has likewise expressed itself regarding the above
qualification under a pevioue administration in Attorney General Gpin-
ion No. )-3015, in which was stated:

             “It would thus be seen a security to be eligible for
      either class (speaking of life insurance corporations
      under 4725 and insurance corporations other than life
      under 4706) of these Texas corporations must be the
      direct obligation of the issuing corporation.    The statu-
      tory definition of eligible securities excludes, therefore,
      stocks or shares evidencing merely participating inter-
      ests by the holders in the net profits, if any, of the issu-
      ing concern.”

             The position of this 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 than those prescribed by stat-
      ute, and indirect evasion of such statutes, as by the
      medium of a subsidiary, will not be permitted . . . .

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


      State to provide specifically how the funds of insurance
      companies shall be invested. In applying such statutes,
      no interpretation of a word, phrase, or sentence con-
      tained in a comprehensive investment code should be
      made without reference to the scheme of the entire
      code . . . .‘I 44 C.J.S. at page 632.

             It thus appears that the agreement by the parent corpora-
tion with the investing insurance company by way of a rt-purchase
agreement does not overcome the inability of the subsidiary company
to meet the requirements of Article 3.39 so as to make the invest-
ment legal, within the strict bounds of the legislative enactment. It
would appear that any other construction of this portion of the statute
would be an undue expansion and clearly subvert the intention of the
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 not the securities of the parent corpora-
tion. Thus, we conclude that the investments are merely invtetments
in the stocks of the 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 in-
            vestments for a Texas insurance company.

CDD:ls                              Very truly yours,

APPROVED:                           WILL WILSON
                                    i;rnmzs
OPINION COMMITTEE:

Geo. P. Blackburn, Chairman              C. Dean Davis
                                         Assistant
Mary K. Wall
.I. Milton Richardson
Fred B. Werkenthin
REVIEWED FOR THE ATTORNEY           GENERAL
BY: W. V. Geppert
