      ’    .




                    TEEATTORNEY       GENERAL
                             OF TEXAS

  WILL    WILSON
AlToRNEy~ENERAl..       :       February
                                       18,1958


      Hon. William A~.Harrleon~~~~ Opinion No. WW-293-A
      Co&imlsslbnerof Insur.9nceS:
      Strte Pe8rd of'Insurance     Re: Di?posltFon to'~bemaat9 0f
      Austin 14, Texas                  Insurance company lnvestmeiits
                                        which a0 not meet quallfica-
                                        tlons required by the appro-
                                        priate Investment statutes.
      Dear Mr. Harrison:
              Thls opinion Is given to you in lieu of Opinion No.
     WW-293 dated October 31, 1957, which is withdrawn.
               You have requested our oplnlon as to the proper pro-
      cedure to be followed under factual situations which inlolve the
      alsposFtion of Investments, which do not comply with statiitorji
      requirements, made by various Insurance companies. The factual
      situations ~11.1be discussed In the order stated in your letter
      of request.

               "1 . Section 4 of Article 3.39 provides that a
          life insurance ,company shall not invest more than
          10s of lb  own ca.#Ltal, surplus and contingency
          funds In the stock of another corporation. ABC Life
          Insurance Companz invests 25% of the amount of its
          capital, surplus,and contingency funds in the capl-
          tal stock of another corporation contrary to Sectlon
          4 of APtIcle 3t39. 'Heretofore It has been the prac-
          tice of the'Bo&    to allow the company to retain the
          entire invea,tnMht,but to non-admit the excess lnvest-
          ment over th&,statutorg llmlt. Should the Board allow
          the Company tb reta1.nthe investment, but for finan-
          cial statement purpos,es (1) ~.non-acimlt
                                                 the entire
          amount or (2) non-a&it the 15% excess investment over
          the amount allowed bg the statute; or should ths,.Bosrd
          require the comp@ny to (3)dispose of the excess ln-
          vestment or (4) dispose of the entire investment, be-
          cause in such'amcunt, It Is not permitted by the
          statute, and is therpfore prohlblted?"
              Be&Ion 4# Article 3.39, Texas Insurance Code, provides
     that any life insurance company mayinvest its capital, surplus
     and contlngenay funas overtand ab6ve the amount of its poll.cyre-
     aervea in the capital stock of another corporation, which
Hon. William A. Harrison, page 2   (WW-293-A)


Corporation must meet certain requirements not here pertinent
provided "that it shall not invest more than ten percent (lO$j
of the amount of its capital, surplus, and contingency funds
in the stock of any one corporation, . . .'. You have stated
that heretofore it has been the departmental interpretation of
this article by your predecessors in office to permit the com-
pany to retain the entire Investment but to non-admit the excess
lnveatment over the statutory limit. We cannot‘agree with your
departmental lnterpretatlon.
         The language contained in the proviso above quoted Is
mandatory and specifically prohibits the Fnvestment by the com-
pany of more than ten percent of the amount of its capital,
surplus, and contingency funds in the stock of any one corpora-
tion. This portion of the statute is unambiguous. It is our
opinion that you should require the insurance company to dispose
of all of its investment in the capital stock of the corporation
which Is ln excess of the ten percent of the amount of the capl-
tal, surplus, and contingency reserves of the insurance company.
          “2 . Section;2 of Article 3.39 authorizes a life
    insurance company to make loans upon first liens upon
    real estate, the title to which 1s valid and the value
    of which is 40s more than the amount of the loan there-
    on. ABC Life Insurance Company makes a loan of $10,000
    secured by a first lien upon real eatate which has a
    value of $10,000, thereby being contrary to provisions
    of Section 2 of Article 3.33. Heretofore it has been
    the practlce,of the Board to allow the Company to re-
    tain the entire investment, but to non-admit the excess
    of the amount of the loan over the statutory limit.
    Should the Board allow the Company to retain the note,
    but for financial statement purposes (1) non-admit the
    excess amount of the loan, (2) non-admit the entlre
    loan, or (3)require the Company to procure the neces-
    sary addltlonal securitg for the loan; or, because the
    loan is not In fact one which 1s permitted by the stat-
    ute,  and is therefore prohibited, should the Board (4)
    require the Company to completely dispose of the asset
    because it aces not comply with the statute?"

         Section 2 of Article 3.39, Texas Insurance Code, pro-
vides that any life insurance company may lend any of Its funds
and accurmlatlons in loans upon first liens upon real estate, the
title to which 1s valid and the value of which is forty percent
more than the amount loaned thereon. It is clear from this fact-
ual situation that the amount of the loan equals one hundred per-
cent of the value of the real estate, thereby violating the ex-
press provisions of Section 2. You have stated that lt has been
Hon. William A. Harrison, page   3   (w-293-A)

the departmental interpretation of your predecessors to permit
the company to retain the entire investment and to non-admit
the excess amount .of the loan over the statutory limit. This
practice we'belleve to have been in error. It is our opinion'
that since the making of the original loan was prohibited as a
matter of law by the provisions of Section 2, the company should
be required to completely dispose of the asset or re-negotiate
or readjust the loan so that the investment meets the standards
of Section 2. However, for the purposes of determining solvency
of the company, that portion of the loan whlch~meets the per-
centage requirements of the statute should be admitted until the
company disposes of the loan, or readjusts it to meet the re-
quirements of the Insurance Code.
         “3. Section 4 of Article 3.39permits a life
    insurance company to Invest its funds in the stock
    and commercial notes of a corporation which has been
    in existence for a period of five years next preced-
    ingthe investment. ABC Life Insurance Company
    invest its funds in the stock and commercial notes
    of a corporation which has not been in existence for
    five consecutive years preceding the Investment,
    which is therefore contrary to Article 3.39. Hereto-
    fore it ,hasbeen the practice of the Board to allow
    the company to retain such an investment, but to non-
    admit it for financial statement purposes. Should
    the Board (1) allow the company to retain the stock
    and notes, but non-admit them for financial state-
    ment plrposea; or (2) since the stock and notes do
    not meet the quallflcatlons of.the statute,and are
    therefore prohibited as investments, should the Board
    require the Company to dispose of the investments as
    being contrary to the statute?"
         Under the provisions of Section 4, Article   3.39, Texas
Insurance code,   any'life insurance company may invest Fts capl-
tal, surplus and contl~ngencyfunds over and above the amount of
its policy reserves   in the,capltal stock, bon&, or other commer-
clal notes issued by,any solvent corporation which has not de-
faulted in payment of any debt within five years next preceding
such investment. This provision necessarily prohibits the lnsur-
ante company from investing in the stock or commercial paper of
any corporation which has not been in existence for a period of
five years next preceding the date of such investment. It appears
that the departmental interpretation of Section 2 by your prede-
cessors has been to allow the company to retain the investment
but to non-admit it for financial statement purposes. It is our
opinion that such departmental construction was in error. The
stock and commercial notes of the corporation which has not been
Hon. William A. Hdrrlson, page 4    (WW-293-A)



in existence for five consecutive years preceding the date of
the investment, being wholly unauthorized as a legal investment
under the terms of the ~statute, you should require the lnsur-
ante company to dlsp0i.eof its entire investment in both the
stock and the commercial notes.

          “4. Section 7 of Article 3.39 permits a life
    insurance company to invest not nore than 5% of its
    admitted assets in the debentures of a pubTIc utll-
    lty corporation. ABC Life Insurance Company invests
    more than 5% of its admitted assets In the deben-
    tures of a public utility corporation, contrary to
    Section 7 of Artlc,le3.39. Heretofore it has been
    the practice of the Board to allow the Company to
    retain the entire investment, but to non-admit that
    part of the investment that exceeds the statutory
    amount. Should the Board allow the Company to retain
    all the debentures, but for financial statement pur-
    poses (1) non-admit the excess of the investment over
    5% or   (2) non-admit the entire investment because it
    does not comply with the statute; or, since the ac-
    tual investment exceeds that amount permitted by the
    statute, and is therefore prohibited by the statute,
    should the Board require the Company to (3) dispose
    of the ,excess investment over 5% or  (4) dispose of
    the entire investment because it does not comply with
    the statute?”
         Section 7'; Article 3.39, Texas Insurance Code, provides
that any life insurance company may invest any of its funds and
accurmlatlons in the debentures of a public utility corporation
meeting certain requirements, but expressly provides that “in no
event shall the amount of such investment Fn debentures under
this subdlvlslon exceed five percent (5%) of the admlttea assets
of the insurance company making the investment.” The departmental
interpretation of Section 7 by your predecessors has been to per-
mit the company’to retain the entire investment but to non-admit
that part of the investment exceeding the statutory five percent.
It is our opinion that this departmental interpretation is ln-
correct in view of;the express prohlbltlon contained in the stat-
                v nt shall.the amtint of such investment exceed
u,:~,“~:Gsw--    he admitted assets of the corporation. There-
fore you should require the company to dispose of its investment
in the debentures in 6xcess of five percent of its ~dmltted as-
sets.
         "5 . Article 340 provides no life insurance com-
    pany shall make any, investment in a home office bulld-
    lng if, after making the investment, the ‘total
Hon. Wllllam A. Harrison, page 5   (WU-293-A)



    investment' of the company in its home office
    exceeds 33 l/3$ of the company's admitted assets.
    ABC Life Insurance Company has admitted assets
    of $750,000.    The Company pays down $250,000 cash,
    takes title to a building worth $500,000, and
      Ives its note to the vendor for an addltlonal
    f 250,000.   In determining what is the 'total in-
    vestment' of ABC Company in its home office prop-
    erty, should the Board (1) look only to the com-
    pany's equity in the building of $250,000, or (2)
    look to the total of the equity plus the note
    given by the Company? If you are of the opinion
    that the Board mst look to the total of the equity
    plus the amount of the note given by the Company
    should the Board allow the Company to retain the
    building, but for financial statement purposes
    (1) non-admit the excess investment in the bulld-
    lng, or (2) non-admit the entire investment; or
    should the Board (3) require the Company ,todls-
    pose of the home office building because it ex-
    ceeds 33 l/3$ of .the Company's admitted assets,
    and is therefore 'prohibitedby statute?
         "In the"same'fact situation as given above,
    the compan assumes .llabllltyon a note for the
    remaining $250;OO0 obligation rather than give its
    own note for such amount. would your answers to
    the above questions still be the same, and if not,
    in what regard.would they be different?
         "In the same fact situation as given above,
    the company merely.takes title to the building
    'subject to' the remaining $250,000 obligation, but
    does not assume llabll~ty therefor. Would your an-
    swers to the questions in the first paragraph be
    the same, and lf not, in what regard jlouldthey be
    different?"
         Article 3.40, Texas Insurance Code, permits any lnsur-
ante company to acquire a home office building, but limits the
investment in such home office building as follows:
         "l(b). No'company shall (after the effect-
    ive date of this Act).make any investment in the
    properties descrlbed=ln paragraph l(a) above if,
    after making s,uchinvestment, the total investment
    of the company in such properties is in excess of
    thirty-three and one-third (33 l/3$) percent of its
    admltted assets as of December jlst next preced-
    ing the date of such investment; provided, how-
    ever, that such Investment may be increased to as
    much as ffftg (50%) percent of the company’s ad-
    mitted assets upon advance approval by the Board
    of Insurance Commissioners; provided further, that
    such Investment may be further increased if the
    amount of such additional increase is paid for
    only from surplus funds and is not Included as an
    admitted asset of the company. . . . .I’
         It 1s further provided that the above quoted llmita-
tions do not apply to a bona fide investment in home offIce
property actually made by contract, or otherwise, for reasonable
and adequate consideration prior to the effective date of the
Act, (Acts 1955, 54th Leg., p. 916, ch. 363).
         It.mst be pointed out that there are ,otherprovisIons
of the Code which require life insurance companies to maintain-
assets of a certain character to the extent of its reserves, capi-
tal and surplus and Ln some instances forbid the holding of real
estate to the extent of such Vtems. (See, for example, Article
3.02 and Sectlon 9 of Artlole 3.39.) Since the applkations of
these additional restrictions depend upon facts outside the scope
of your request, we.‘expressno opinion thereon.
          The word ‘%nvestment” is dlfflcult to define, and since
it’Is deemed vague and has acquired no technical definition, the
meaning mat be determlned by the context in which it is used.
When used with reference,‘toproperty, the term involves the idea
of fntended profit and Implies the contractual relation of pur-
chaser and seller or .borrower and lender, and a certain measure
of permanence In contrast to a speculative or temporary measure.
48 c.Lr.9. p. 760. Applying the broad general definition to the
word “Investment” as used In Article 3.40, It seems clear that
the term “Investment in a home office building” would indicate
the amount of capital, whether repreeented by money or by promis-
sory notes, which the Insurance company has obligated itself to
pay as a consideration for acquiring the home office building
which is to be used, for the purpose of making a profit for the
insurance.company upon the funds expended or to be expended’for
its Furchase. It la also true that when the lnsuranoe company
executea its note to the vendor of the property for $25O,OOO.OC
aa part of the purchase price thereof, the company has oblLgated
its assets to that extent and that such obligation would conati-
tute an investment. If the insurance company, havtng $25O,OOO:OO
of its own money, which represents part of Fts admitted~‘asseta,
borrowed from a third party an aqua1 amount, then purchased the
home office buLldFng for $500,000.00 In cash, the purchase price
Hon. William A. Harrison, page   7   (WW-293-A)



would represent ah Investment made by the insurance company in
a total amount of $500,000.00. It is Immaterial whether the
addltlonal $25O,O:OO.OOts represented by a note to the vbndor
of the property or ,whether it is represented by a note payable
to a third party.
         We hold that the term “investment” as used in this
Article includes the total cash and notes of the company given
for the purchase price.
         Under the factual situation given by you, assuming
that the ABC Life Insurance Company had no sur@us fuhds, where
such-company had $750,000.00 in admitted assets and,paid down
$25Q,OOO.O0 in cash, taking tltle to a building worth $5OO,OQO.00,
and giving Its note to’the vendor for an additional $25O,OOO.OO,
the total investment by the company In such a building would be
$500,000.00 or two-thirds of its admitted assets. Such an in-
vestment being in excess of the limits permitted by Article 3.40
would be improper and the Board should require the company to
dispose of the same, or make such other adjustments as will bring
the investment within permissible limits. For the purposes of
determining the solvency of the company, that portion of the in-
vestment not in excess of 33 l/3$of its admitted assets should
be admitted until the company disposes of the investment or makes
such other adjustment as will bring the investment within the
permissible limits.
         You then requ,estour opinion at to whether the fact
that the $250,000.00 note in question waa assumed by the com-
pany instead of being executed by it would change the status of
the investment. In the alternative, If the company took title
to the home office building subject to a $250,000.00 outstanding
obligation and did not assume liability for the payment thereof,
you ask if the situation.would be changed. The dFfference be-
tween the assumption by a purchaser of an outstanding obligation
Imposed upon property and the t,aklngof title to the property by
the purchaser subject to t,heoutstanding ob.IigationIs well
stated in Fidelity Union.Frre Insurance Co. ‘v.Cain, 28 S.W. 26
833, a35 (civ e APP. 1930)as follows:
        “The difference between a purchaser of land
   assuming a payment of a lien Indebtedness thereon and
   in purchasing the land subject to such indebtedness
   is simply that, in the former case the purchaser be-
   comes personally liable for the payment of the in-
   debtedness while in the lat.tercase no such personal
   llablllty exists .I’
Hon. Wllllam A.~Harrlson, page 8   (w-293-A)


In accordance with this legal principle It would be immaterial
whether the lnsurance~com any executed its own note payable to
the vendor In the sum of $25O,OOO.O0 or assumed the payment to
its vendor of a note in the sum of $25O,OOO.OO which had been
executed by a third party, both notes being secured by a lien
upon the property in question.
         Where the home office building is conveyed to the ln-
surance company subject to a previous Indebtedness in the sum
of @5O,OOO.OO, a different rule would prevail. In all three
cases described, the indebtedness would constitute a burden upon
the home office building, the latter constituting a primary fund
for the discharge of such indebtedness. However, in the case of
the company acquiring the title to the building from A subject
to an outstanding indebtedness in the sum of $25O,OOO.O0 owing
by A to B, which was secured by a lien upon the property In
question, and which indebtedness the company did not assume to
Pay to B, it 1s our opln.lonthat the Investment made by the ln-
surance company would be only in the amount of $25O,OOO.OO, the
primary obligation to pay such indebtedness to B remaining in
A, the maker of the note. In this connection it may be noted
that although a deed,may contain a clause that the land is pur-
chased subject to the lien indebtedness, the use of other lan-
guage in the deed.may evidence an IntentIon on the part of the
purchaser to become,personally liable for such indebtedness.
          “6. ABC Life Insurance Company has total ad-
    mltted assets of $500,000. An outside source
    makes a surplus contribution to the company of a
    home office building which is worth $500,'000,and
    the Company carries the building as an admitted
    asset at this figure'... Is this building an 'in-
    vestment' which 1s prohibited by the statute be-
    cause it exceeds 33-l/3$   of the admitted assets
    of the Company? Or 1s it admissible as tn asset
    because the Company has not expended or invested'
    any of its funds or accumulations to acquire the
    bulldlng? In other words, where an insurance com-
    pany does not actually expend or 'Invest' any of
    Its funds or accuamlations in an asset which would
    otherwlae be prohibited by applicable statutes,
    should the Board consider the Item just as though
    funds had actually been expended or Invested there-
    for? Would it make any difference if the item waa
    capitalized or remained as surplus?"
         It appears from the above factual situation that,the
life insurance company has acquired as a contribution without
        ent of any consideration therefor a home office building
                 Article 3.40 of the Texas Insurance Code as
Hon. William A. ‘Harrlson, page 9   (WW-293-A)


amended In 1955, expressly allows a life insurance company to
 “secure, hold and convey” real estate only for the purposes and
in the manner named and authorized In hrtl.cle3.40.     Section
l(b) of this Article provides a llmltatlon on the “investment”
that a company may make in home office property. This provlsion
makes the use of funds or assets ~of such a company in excess of
the limits described improper. Since, in the instant case, no
funds or assets of the company have been used to acquire .the
property, there has not been an Improper use of the companyy’s
finds, even though the contributed property exceeds the statu-
tory percentages allowed S In our answer to your Question No.
5, we have previously held that Section l(b) of Article 3.40 not
only prohibits the investment of funds in excess of the limits
therein prescribed, but also prevents the company from showing
as an admitted asset the excess by which such investment exceeds
the permissible limits. While the first impression may be that
this restrlctlon on the admissibility of home office property -’
as an asset applies only to home office property acquired by way
of investment, we do not believe such a construction properly
reflects the leglslatlve,lntent in the enactment of the amend-
ments to Article 3.40 In 1955. Section l(c) of Article 3.40 is
as follows :
                    ,,
          “The value ,,ofeach such investment in the prop-
     erties described In Paragraph l(a) shall be subject
    to the approvaA by the Board of Insurance Commisslon-
     ers; and the Board may, in its discretion, at the
    time such Investment is made or any time when an ex-
    amination of .the..
                      company is being made, cause any
    such investment to be appraised by an appraiser ap-
    pointed or approved by the Board, and the reasonable
    expense of such appraisal shall be pald by such Fn-
    surance company and shall be deemed to be a part of
    the expense of examination of such company. No such
    insurance company may hereafter make any increase in
    the valuation of any of the properties described in
    Paragraph l(a) unless and until such Increased valua-
    tion shall be likewise approved by the Board, subject
    to the limitations and conditions set out in Paragraph
    l(b) ;”
          The purpose of this section of Article 3.40 Is to pro-
vide a mechanism for valuation of home office property. It Is
true that in the first sentence of this section the description
of .the property Is couched in the term of “an investment”, but
note should also be made of the l.astsentence of this section,
wherein It is provided that any increases in valuation of “any
of the properties ,deacrlbed in paragraph l(a)” must be approved
Hon. William A. Harrison,   page   10   (W-293-A)



by the board, “subject to the limitations and conditions set out
in paragraph l(b) ‘I. The property described In paragraph l(a)
is ‘one building site and office building” regardless of whether
the same was acquired by means of Investment in contrast with an
acquisition by way of contribution. No reasonable argument could
be advanced that the Legislature intended that the original eval-
uation of home offlce property acquired by means of contribution
would not be subject to the admitted assets limitations of Sec-
tion l(b), while at the same time increases in valuation should
be so limited.
         It mat be noted that the Legislature has not always
used the term “investment” solely in the strict sense of prop-
erty acquired by means of disbursement of funds or assets. One
only need look at the provislons of Subsection (5) of Section 1
of Article 3.02 as amended by S.B. 12, 54th Legislature, 1955
(same bill amending Article 3.40), to see that this statement is
correct. This provls,l.onis, In part, as follows:
         “Such minimum capital and surplus shall, at
    the time of incorporation, consist only of lawful
    money of the United States, or bonds of the United
    States, or this State, or of any county or incor-
    porated municipality thereof, or government insured
    mortgage loans which are otherwise authorized by
    this chapter, and shall not Include any real estate;
    provided, however,,t,hatfifty (50%) per cent of the
    minlnuxmcapital may be Invested in first mortgage
    real estate loans. ‘After the granting of charter,
    the surplus may be invested as otherwise provided In
    this Code. Notwithstanding any other provisions of
    this code. such minimum capital shall at all times
    be maintained In cash or 16 the classes of lnvest-
    me&s described in this Ax-tlcle.”
          To give the term “invested” the restricted meaning would
require that at the time of incorporation the mlnllrmmcapital and
surplus may, for instance, “consist” of government insured mort-
gage loans not necessarily acquired by Investment, but that a8
to other first mortgage real estate loans, the company rruasthave
acquired such aaseta by means of a disbursement of lta funds or
assets. Slmllarly, in the last sentence quoted above, the Legls-
lature has provided that the mlnlnum capital shall at all times
be “malntalned in cash or in the classes of investments” described
therein. Obviously, this provision was not intended to require
the company to maintain its mlnlumm capital in the form of assets
which had been acquired by the disbursement of its funds or other
aaseta.   Clearly, the meaning here given to the term “investments”
by the Legislature is synonymous with the terms “property” and
“assets”.
Hon. William A. Harrlson, page 11   (WW-293-A)


         Similar treatment of the term "investments" and its re-
lated terms may be observed in Artfcle 3.22 and Section 9 of
Article 3.39, each of which provisions were amended by Senate
Bill 12 of the 54th Legislature, 1955, which is the same bill
amending Article 3.40here under discussion.
         The restrictions embodied in Section l(b), limiting
the value of home office property which may be included by a com-
pany as an admltted asset, were placed in the law for no other
purpose than to provide security for the policyholders and stock-
holders. As these contributed assets will be used to make up
the necessary reserves and other pro-tectlonrequired by law for
policyholders' and stockholders' benefit, we are of the opinion,
in view of this fact and the foregoing discussion, that the con-
tributed home office building in your fact sltuatlon may be
shown on the statement of the company as an admitted asset only
to the extent and percentage permitted by Section l(b) of Artl-
cle 3.40. Any amount over the statutory percentages umst be
non-admltted as an asset, because the statutory protection to
policyholders and stockholders is not available In thLs excess.
         "7. Article 2.08provides that the capital
    stock and mInimum surplus of a casualty company
    shall consist o&of    certain specific items. The
   capital stock and~,mlnlmumsurplus cf XYZ Casualty
   Company consists'of cash, United States Government
   Bonds, several notes secured by first mortgages
   upon real estate, the title to which is valid, but
   the payment of whFch',lsnot insured by the United
   States or any of its,agencIes, which is contrary to
   Article 2.08,and a number of notes secured by
   first mortgages upon real estate, the title to which
   Is valid, and the payment of which is insured by the
   United States or one oP its agencies, but the total
   amount of these insured notes exceeds 50% of the
   capital stock and mlnlrrolmsurplus of the insurance
   company, whicth is also contrary to Article 2.08.
   First, should the Board (1) allow the company to re-
   taFn the uninsured notes, but non-admit them for
   financial statement purposes, or (2) require the
   company to completely dispose of those notes which
   are not Insured because they are not authorized by
   the statute, and thus are prohiblted by it? Second,
   in dealing with the insured notes, should the Board
   allow the company to retain these notes, but for
   financial statement purposes (1) non-admit that
   amount of the notes that exceeds 50% of the capital
   stock and mlnlmm surplus or (2) non-admit the total
   amount of these notes because Ft exceeds 50% of the
Hon. William A. Harrison, page 12   (WW-293-A)


    capital stock Andyminimum surplus and is thereby pro-
    hibited by the statute; or should the Board require
    the company to (3), dispose of that amount of the notes
    that exceeds 50$,Lofthe capital stock and minimum sur-
    plus or (4) dispose of the total amount of the note3
    because it exceeds 50% of the capital stock and mini-
    rrmm surplus, and is thereby contrary to the statute?"
         Article 2.08, Texas Insurance Code, require3 that the
capital stock and minlmm surplus of a casualty insurance com-
pany shall consist only of certain items, one being notes'secured
by first mortga,ges'uponunencumbered real estate in Texas, the
title to which is valid and the payment of which notes-is Insured
by the Unlted.States of America or any of its agencies, provided
that the investment in such notes shall not exceed one-half of
its capital stock and minimum surplus. Since the provisions of
Article 2.08 are mandatory, none of the uninsured notes should be
permitted to constitute a part of the capital stock or minimum
surplus, and only such insured notes as do not constitute more
than fifty percent of the capital stock and minlrmm'surplus of
the company should be permitted to remain in that category. The
Board should require such company to dispose of such property
and replace the same with property which meets the standards of
Article 2.08 for the investment of the capital stock and minimum
surplus, or requLre that such other step3 be taken as will secure
compliance with the terms of Article 2.08.
         It should be pointed out that Section 3, Article 2.10,
Texas Insurance Code, provides that a casualty company may invest
its funds over and above its capital and minimum surplus in first
mortgages upon unencumbered real estate, the title to which is
valid and the market value of which is not less than forty per-
cent more than the amount loaned thereon. In view of this provl-
slon the uninsured note3 secured by une-clcumberedreal estate, the
title to which is valid and the market value’ of which is not less
than forty percent more than the amount loaned thereon, and the
Insured notes in excess of fifty percent of the capital stock and
mlnimum surplus of the company may be retained by the company'as
admitted assets provided they are not included In the financial
statement of the company as a part of the capital stock and minL-
mum surplus.
                        General Comments
    It 1s well settled law In Texas that the departmental
construction or interpretation of a statute by the officer, agency,
or department charged with its enforcementstouldbe given great
weight in construing the statute involved. However, this rule of
law is only'appllcable where the verbiage or phraseology of the
statute is ambiguous or misleading. Departmental construction or
Hon. William A. Harrison, page 13   (Ww-293-A)

interpretation may not be looked to in construing a statute,
the terms of which are clear and unambiguous. Ramsey v. Todd,
95 Tex. 614,69 S.W. 133, 136 (1902 ; McCallilmv. Retail Mer-
chants Association, 41 S.W. 2d 45, 7 (Comm. App. 1931).
          In our answers to questions 1, 2, 3 and 4, we have
held that the departmental construction of the statutes in qiies-
tion by your predecessor Boards of Insurance Commissioners have
been in error upon the ground that each of the statutory provl-
sions involved Is clear and unambiguous. Our holding is based
upon the phraBeOlOgy contained In the first sentence of Article
3 .X9, Insurance Code, which states that “A life insurance com-
pany organized under the laws of this State may invest in or
loan upon the following securities, and no other, . . .‘I The
foregoing language is clear and unambiguous and applies to any
loan or investment made under subsections 1 to 8, inclusive, of
Article 3.39, ‘and is contrary to the departmental construction
heretofore placed by the Board of Insurance Commissioners on the
various subsections of Article 3.39 discussed in this opinion.
         Recognition must be given to the fact that many in-
vestments and loans have been made by various companies In good
faith compliance with the departmental interpretation or con-
struction of the statutory provisions involved. Also, since
many of the limits discussed involve percentages which, in turn,
relate to questions of value, there is mutchroom for honest dif-
ferences in opinion and judgment as to the propriety of any given
Investment. WhLle the final decision of the Board on these mat-
ters must be given effect, the Board LB vested with sufficient
discretion to extend the time limlf for disposal or adjustment
of the improper investment so as to prevent, or minimize, the ln-
jury which might atten.dan immediate or untimely dlBpOBitlOn or
adjustment of such investment.
         Cur answers aa above Bet forth are further qualified
as follows: Although at the time of the investment the transac-
tion was ln violation of the provlsfons of the Insurance Code, if,
by reason of changed cond.itlonB,BUCh as an Increase in the amount
of the admitted assets or a decrease Ln the amount of indebtedness,
or by virtue of other factors the present status Is such that the
transaction, lf negotiated at the preser,ttime, would not be vlo-
latlve of the provisions of the Insurance Code, the insurance com-
pany should not be required to dispose of same.
         Further, this office expresses no oplnlon on whether the
Investments described In your questions may or may not qualify as
legal investments under some other provision of the law than the
speclflc provlslons of the Insurance Code mentioned in such exam-
ples.
‘.      .




     Hon. William A. Hartiison,page 14     (WW-293-A)




                 A life insurance company inaynot investsits
            funds in the capital stock of any one corporation
            lh excess of ten percent of the amount of its
            capital, surplus and contingency reserves.
             A loan made by a life insurance company on'.
        real estate where the amountof the loan Is equal
        to the^total value of the real prdperty securing
        the loan Is tmproper and'the company should'be re-
        quired to dispose of such asset or renegotiate or
        readjust the loan so that it meets the standards
        of Section 2, Article 3.39, Texas Insurance Code.
        For the purpose of determining the solvency of
        the company, that portion of the loan which meets
        the percentage requirements of the statute should
        be admitted until the company disposes of the loan
        or readjusts it.~ ..
             A life Lnsuranc'ecompany cannot Invest its
        capital, surplus and contingency reserves in the
        stock or commerclel notes of any company which
        has not been,in existence for a period of five
        gears next preceding the date of 'such investment.
             A life intiur'arice
                              company cannot.lnvest more
        than five percent of its admitted assets in the
        debentures of e public utility corporation.
             A life Insurance company may invest its ad-
        mitted assets in a home offlce under the provisions
        of Article 3.40 to the extent of Fts surplus and
        33-l/3$ (or 50$ with permission of the Board) of its
        admitted assets to the extent of its capital, lle-
        blllty and reserves. The amount of such total in-
        vestment In excess of 33-l/3$ (or 50s with permis-
        sion of theBoard) of its admitted assets may not be
        included es en asset of the company for statement
        purposes. An Investment in home office property in
        excess of these limits is improper and the company
        should be required to dispose of such investment or
        make such other adjustments as ~111 bring the in-
        veetment withtn permissible llmlts.
             For the purposes of determining solvency of a
        company, that portion of its investment in home of-
        fice property not in excess of 33-l/3$ of Its eamit-
        ted assets should be admitted until the company
   .




Hon. William A. Harrison, page 15   (W-293-A)



    disposes of the investment or makes such other ad-
    justment as will bring the Investment within the
    permissible limits O
        The term “investment” as used in Art lcle 3.40
   includes the total cash and notes, either executed
   or assumed by the company, that the company has
   given for the purc’haseprice of such home office
   property.
        Where an office bulldlng is contributed as
   surplus contribution 50 an insu.rancecompany wlth-
   out the payment of an:yconsideration therefor by
   the company, such transac,tlonis not improper though
   it exceeds the statutory percentages allowable un-
   der Article 3.40, but such property may be shown as
   admitted asset only to the extent an,dpercent-
   ages allowed b,ysaid Article.
         The capital stock and minimum surplus of a
   casualty company can only be icvest.edin the Items
   speciflcallg named In Article 2,08, Texas Insurance
   Code e
        The Board La vested with sufficient discretion
   to extend the time i1mi.tfor the disposal or adjust-
   ment of Improper investments so as to prevent or
   mlnlmlze the Injury which might at:end an lmmedlate
   or untimely disposltioc or adjustment of such in:.-
   vestment O
        Although at the time of the investment the
   transac,tlonwas In vl.olatFonof the provisions of
   ,theInsurance Co;ie,if y ty,reason of changed condl-
   tions the present status is %ctl that the transac-
   tion, If nego,tiatedat ?he present time, would not
   be violative of the p:?ov:sionsof the Ir.suranceCode,
   the Lnsurance comptrngshould not be required to dls-
   pose of the same.
. .   *,




 Hon. William A. HarrIson, page 16         (+J’W-293-A)


                          ,,:’
                                  Yours very truly,
                                  WILL WILSON   "
                                  Attorney General of Texas

                                  By   s/C.K. Rich&d8
                                         C II.Rrchards
                                         Aisistant
                                       s/Fred B. Werkenthin
                                         F d B Werkenthin
                                         AEEistint
 FBW:CKR:wb:wc

 APPROVED:
  OPINION COMMITTEE
 Geo. Pi Blackburn, ChaLrman
 &-a. Marietta McGregor Payne
 William E. Allen
 Houghton B~rownlee,Jr.
 REVIEWEDFOR      THEA'$"l?ORNlPYGENERAL
 BY:       W.V. Geppert
