                                                           May   31, 1956


Hon. J. Byron Saunders, Chairman
Board of Insurance Commissioners
Austin, Texas

                                                     Opinion     No. S-2 00

                                                     Re:    Whether   book value or market value
                                                            of out of State securities    of a wholly
                                                            owned subsidiary    held by an insur-
                                                            ance company    should be used in com-
                                                            puting gross premium       taxes under
Dear     Mr.   Saunders:                                    Article  7064, V. C. S.

                Your letter         requesting             our opinion   in reference   to the captioned
matter      reads, in part,         as follows:

                “The 1955 tax return of Western        Casualty   and Surety
          Company,     made for the purpose of computing         gross pre-
          mium tax under Article      7064 R.C.S.,    shows that the com-
          pany had the highest percentage       of its admitted    assets in-
          vested   in the state of Kansas.    Included in the securities
          held in the state of Kansas is stock of the Western          Fire
          Insurance    Company,   a wholly-owned      subsidiary    of Western
          Casualty   and Surety Company.       The book value of this stock
          is shown at $1,924,700.00,     while the market value is shown
          at $6,680,755.92.
                u
                    .   .   .

                “Premises   considered,  we would appreciate    your
          advice as to the proper basis for determining      the amount
          which Western    Casu,alty and Surety Company    has invested
          in the stock of the Western   Fire Insurance  Company.
                  II
           . . .

                Article         7064,    Vernon’s       Civil Statutes, provides  that every insur-
ance     corporation        other       than life,    at the time of filing its annual statement,
shall    report
.




    Hon. J. Byron Saunders,    page 2     (Opinion No. d-200)


                Y
                   . . . to the Board of Insurance Commtssionera on
           Or  before the first day Of &rch af each year, the 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 ln eimilar securities    in the State
           in which it had its highest percentage of admitted assets
           invested, . . . If the report of such insurance organixa-
           tion as of December 31st preceding, shows that such or-
           ganication had invested in Texas securities,   as herein
           defined, an amount which is not less than seventy-five      per
           cent (75%) nor more than eighty per cent (80%) of the
           amount that it had invested in similar securities    in the
           state in which it then had the highest percenta e of its ad-
           mitted aeaets invested, its tax shall be 3.025 t o of such
           gross premium receipts . . .-

               Subsequent provisions of the Act make the tax progressively
    lower as the percentage of investment in Texas securities increases.

                 It is our opinion that the terms “the amount of such investments”
    and “had invested* as used in Article      7064,‘supra. mean the initial amount
    of money or money’s worth used to purchase the security.         The express
    purpose of the Act is to encourage, by offering a lower tax rate, those in-
    surance   carriers   subject to the Act to make investments in Texas securi-
    ties. If the market value of the securities, which fluctuate in value, is to
    be used in the determination of the amount of the investments, the purpose
    of the Act would in a measure be defeated, in that the insurance carriers
    would always be in doubt as to whether they had invested sufficient funds
    ln Texas securities in order to receive the benefit of a lower tax rate. Mar-
    ket value fluctuates and the market value of securities     is often a question of
    opinion. We believe that the Legislature      intended the amount the insurance
    carriers   *had investedY to be a certain and fixed amount. In fact, the pur-
    chase price paid for a Texas security is in aid of the financial economy of
    tha State. An increase in the market value of the security would inure to
    the benefit of the insurance carrier only.

               To hold that the market value of a security determines the
    amount inverted woul,d lead to absurd results.  Article 9.02 of the Insurance
    Code pertaining to title insurance provides, in part, as follows:

                 “Any corporation organised under this chapter having
           the right to do a title insurance business may invest as
           much as fifty (50%) per cent, of its capital stock in an ab-
           stract plant or plants, . . .*
Hon.   3, Byron     Saunders,   page   3   (Opinion   NO. S-SOO)



             The Court of Civil Appeals      held in Kansas City Title Ins. Co.
v. Butler,  253 S.W. 2d 318 (1952, writ ref. n.r.e.),        that an abstract plant
is a Texas security     under the provisions     of Article    7064. We eive the fol-
lowing illustration-to   demonstrate    that market value should norbe used to
determine    the amount invested.     A title insurance      company has a capital
stock of $100,000.00.     It secures   an abstract    plant by expending       $50,000.00.
Thereafter    the market value of the plant increases         to $60,000.00.     The title
insurance   company would be in violation       of Article    9.02, supra, and in order
PO comply    therewith  would have to either     increase    its capital stock to
$120,000.00,    or dispose of a portion of its abstract        plant.   On the other hand,
the market value of the plant decreases        to $40,000.00.        The company could
then invest an additional    $lO,OOO.OO in such plant and wind up with 60% of
its capital stock converted     into such security,     in violation    of said article.

                                           SUMMARY

            The purchase  price of securities   held by insurance
        companies should be used in computing     the gross premi-
        um taxes under the provisions  of Article   7064, V. C. S.

                                                Yours   very   truly,

APPROVED:                                       JOHN BEN SHEPPERD
                                                Attorney General of Texas
J. Arthur   Sandlin
Reviewer
                                                By    )+&yyjL.f+~
J. C, Davis,      Jr.
Reviewer                                              W. V. Geppert
                                                      Assistant
L. W. Gray
Special Reviewer

Davis Grant
First Assistant

 John Ben Shepperd
.Attorney General
