            "P'HEA~~ORNEY              GENERAL
                       OFTEXAS




Honorable 0. P. Lockhart, Chalrman
Board of Insurance Commissioners
Austin, Texas
Dear Sir:                   Opinion No. Q-5255 "'
                            Re: Departmental"practice with re-
                                 gard to valuation clauses in
                                 life insurantie~
                                                policles~~submltt-
                                 ed to the Board of Insurance
                                 Commissioners.
       Your letter requesting the opinion of this department
on questions statad therein is as follows:
       "I * Texas Comuanies
      "Article 4732, Section 7 requires that every
   policy providing-'non-forfeiturebenefFts must con-
   tain a clause stating the mortality table and the'
   interest rate used incomputing the legal-reserves
   for the policy. Article 4682, Sectlon 3'and'~Arti-
   cle 4688 provLde that the Commissioner or his rep-
   resentative'must compute the legal reserve value
   of all policies at the end of each year'; In order
   to domplgwlth thPs requirement, it is also nec-
   essary~that the valuatlbn clause of any lnsui+ancb
   policy; whether It contains non-forfeiture values
   or not, state the method of valuation to be -em-
   ployed (i.e., the full net level method of valua-
   tion, the full preliminary term method the
   modified preliminary term method, e'ccif: In the
   absence of any statement to the contrary, It will
   be assumed that the full net level basis ts the
   method of valuation Intended.
      'Although Article 4732';Section 7 specifies'
   no particular mortality table to be used, Article
   4688, SectXon 2 by Implication requires that the
   reserve lfability maintained on account of any
   policy shall not be less than the reserve-.computed
   on the basis of the American Experience Table of
   Mortalltg with the interest rate speciffed In the
   policy if such interest rate is less than four
   per cent. A further implication that has been
                                                           -




Honorable 0. P. Lockhart, page 2         O-5255



    and is generally accepted by all Texas companies
    and by Departmental practice is that the~non-for-
    feiture values provided in any policy shall not
    be less than the non-forfeiture values computed
    on the basis of the American Experience Table of
    Mortality ana the rate of interest specified in
     the policy when such rate is less than fbur per
    cent. Hence, there would be no point in any Texas
    company inserting a valuationclause in any of its
    policies which would specify a mortalitytable that
    would result In lower reserves than the correspond-
    ing American Experience reserves, even though such
    practice might not be specifically prohibited by
    law.
       "II.   Foreign Companies Doing Business in Texas
       "Although the Articles mentioned above as ap-
    plying to Texas companies are worded in such man-
    ner as to indicate that they also apply to foreign
    companies doing business in Texans,their appllca-
    tion to foreign companies is complicated by the
    provisions of Article 4682, Sectlons 3~, 4 and 5
    and by Article 4734.  In stud ltigthe application
    of Article 4682, Sections 3, t and 5 and Article
    4734 to this situation, it is well to bear in mind
    two different points of view with regard to the
    valuatlon of insurance policies, First, there is
    the aggregate~~pointof view, from which'the sum
    total of the amounts of legal reserve maintained
    on account of each policy in force constitutes the
    Insurance company's current liability on account
    of Its insurance in force. This pointof view is
    Important to the Company In that It measures the
    amount of securLtie3 it must hold in order to be
    able to meet its obligations as they become due on
    its outstanding Insurance policies, This point of
    iriew1s Important to the policyholde? in-.thatthe
    amount of legal reserve held by the company measures
    to a certain extent the ability of the company to
    meet Its obligations under his policy.
       "The second point of,view Is the Individual
    point of view, and Is concerned chiefly with the
    determination of non-forfeiture benefits such as
    dash and loan values, paId up Insurance values,
    and extended insurance values. This point of view
    Is Important to the company in that it determines
    many of the benefits to be granted policyholders,
    and Is important to the policy owner in that it
Honorable 0. P. Lockhart, page 3         O-5255



    determines the extent of many of the benefits and
    privtleges he Is to receive.
      "We desZre your opinion upon the following
   points: (a) does Artitile4682,~Section 5 permit
   the Commissioner to'accept for 'filingunderArtl-
   cle %749'llfe insurance policies issued by foreign
   companies doing business In this State whlch'con-
   tain a valuatlon clause less liberal to the ln-
   sured and more liberal to the company than that
   required of Texas companies, or does such Article
   merely allow the Commissioner to accept the state-
   ment of the commissioner of another State showing
   the amount of reserves calculated and stating that
   such reserves have been.calculated In accordances
   with the Texas Statutes, and (b) does Article 4734
   require the Commissioner to accept for filfng in--‘
   surance pollcles issued by fbreign companies opera-
   ting In Texas containing a valuation'clause 3pe-
   cFfying a valuatlon basis less liberal to the in-
   sured and'more liberal to the company than that
   required of Texas companies when such foreign com-
   panies' home State has a law requiring the~~useof
   such valuation clause by all companies organized
   under the provisions of its law, and what is the
   situation when such other State ha3 a law similar
   to Article 4734?”
       Article 4732, Vernon's Annotated Clvll Statutes, reads
in part as follows:
       "No polfcy of life insurance shall be issued
    or delivered in this State, or be Issued by a life
    Insurance company organized under the laws of this
    State, unless the same shall contain provIsIons
    substantially as follows:
       ,I
        . . . * .
       “7 . A 'provlslonwtilch,in event of.default
               payments, after premiums shall have
    in preinium~~
    been pai~dfor three full"year8, shall secure to
    the owner of the policy a stipulated form-~ofIii-
    surance, the net value of which shall be at least
    equal to the reserve at the date of default on
    the policy, and on any dividend addrtlons there-
    to, specifying the mortality table and rate of
    interest adopted for computing sudh reserve, less
    a sum not more than two and one-half per cent of the
    amount insured by the policy and of any existing
Honorable 0. P. Lockhart, page 4           O-5255


    dividend additions thereto, and.less any existing
    Indebtedness to the company on the policy. Such
    provision Shall stipulate that the policy may be
    surrendered to the company at its home office
    within one month from date of default for a spe-
    cified cash value at least equal to the sum which
    would otherwise be available for the purchase-'of
    insurance, as aforesaid; and may stipulate that
    the company may defer payment for not more than
    six months after the application therefor is made.
    This provision shall not be required in term in-
    surances.
    ~.'.
       v*.. A table showing In figures the loan
    values, and the options available under the poli-
    cies each year, upon default In premium payment3
    during the first twenty years of the polby or
    the period during which premiums are payable, be-
    ginning with the year in which such value3 and
    options become available.
       "9 . That if';In event of default In premium
    payments, the value of the policy Shall be applfed
    to the purchase of other insurances; and if such in-
    surance Shall be In force and the original policy
    shall-shavenot been surrendered to the'company
    and canceled, the policy may be reinstated within
    three years from such default upon evidence.of in-
    surability satisfactory to the company and pay-
    ments of arrears of premiums with Interest.
       II
        . . . . .I(
       Article 4734,   Vernon's Annotated CivFl Statutes, reads
as follows:
       "The policies of a life Insurance company
    not organized under the laws of this State may
    contain any provlslon which the law of the State,
    territory, districtor county under which the
    company IS organized, prescribes Shall be in such
    policies when issued-'inthis State; and the poli-
    cies of a life insurance company organized under
    the laws of this State may, when iSSUed or dellver-
    ed-in any other State, territory, district or coun-
    ty, contain any provLsion requlred by the law3 of
    the State; territory, district or coUntyin which
    the same are Issued, anything in this chapter to
    the contrary notwithstanding."
Honorable 0. P. Lockhart, page 5           O-5255



         Article 4749, Vernon's Annotated Civil Statutes, pro-
vides:
       "Life insurance companies shall, within five
    days after the Issuance of, and the placing upon
    the market, any form of policies of life insur-
    ance, file a copy of such form of policy with the
    Insurance Department."
       Article 4682,   Vernon's Annotated Clvil,Statutes, pro-
vides in part:
       "In addition to the other duties required
    of the Commissioner, he ahall perform duties as
    follows:
         0. . . 0 s

            Calculate net value of policies. -- He
         “3 0
    shall, as soon as practicable In each year, cal-
    culate or cause to be calculated in his office by
    an officer or employe of his department, the net
    value on the thirty-first day of December of the
    previous year of all the policies in force on that
    day In each life or health insurance company doing
    business in the State, upon the basis and in the
    manner prescrived by law.
       “4 . See that net value of policies are on
    hand. '--Having determined the net value of all poli-
    cies in force, he shall see that the company has in
    safe securities of the class and character required
    by the laws of this State the amount of said net
    value 'ofall its policies, after all its debts
    and claims against it and at least one hundred
    thousand dollars of surplus to policy holders
    have been provlded for.
      “5 * May accept valuation of other States. --
   He may accept the valuation made by the Insurance
   commissioner of the State under whose authority
   a life insurance company was organized, when such
   valuation has been properly made on sound and
   recognized principles, as a legal basis as above,
   The company shall furnish to him a certificate of
   the insurance commissioner of such States, set-
   ting forth the value calculated on the data desig-
   nated above of all the policies in force in the
   company on the previous thirty-first day of Decem-
   ber, and stating that, after all other debt8 of
Honorable 0. P. Lockhart, page 6               O-5255



         the company and claims against It at that time,
         and one hundred thousand dollars surplus to'policy
         holders, were provided for, the company had, in
         safe securities of,the character requlred by the
         laws of this State, an amount equal to the net
         value of all Its policies in force, and that said
         company is entitled to do business In its own
         State.
             . . . . .II
            r,

       Generally speaking, It is stated in American Jurlspru-
dence, volume 29, page 67:
        "Modern statutes require liisurersto main-
     tain reserves to assure the payment of losses
     covered by their policies and the return of un-
     earned premiums. The term 'reserve' or 'reserves'
     In the law of insurance means in general a sum of
     money variously computed or estimated;which, with
     accretions from interest, Is set aside, 'reserved,'
     as a fund with which to mature or liquidate, either
     by payment or reinsurance with other companies,
     future unaccrued and contingent claims, and claims
     accrued.but contingent and indefinite as to amount
     or time of payment. Such term has a di8tinCtiVe
     meaning in respect of life insurance maintained on
     the level-premium basis. In such situation, the
     amount of the premium is necessarily greater than
     the mortality cost during the early years of the
     insurance and less than the mortality cost In
     later years. With the mortality table and an
     assumed rate of Interest on the investment of
     premiums received, the amount of the accumulated
     savings on this basis, at kng date, can be mathe-
     matically computed. This amount constitutes the
     'reserve' against the policy or its net value.
     The Insurer must have on hand the aggregate
     amount of these reserves against its outstand-
     ing policies. The reserve against a life insur-
     ance policy constitutes the source of its non-
     forfeiture value upon a lapse In payment of
     premiums."
           Article 4688,   Vernon's Annotated Civil Statutes, pro-
vises:

            "The Commissioner, as soon as practicable
         in each year, shall compute the reserve liability
         on the thirty-first day of December of the pre-
Honorable 0. P. Lockhart, page 7         o-5255



    ceding year of
                 ^.every
                    .    company organized
                                 . -.      under the
    laws of this Jtar;e,or~autnorlzea to transact
    business in this State, which has outstanding
    policies of Insurance on the lives of citizens
    of this State In accordance with the following
    rules :
       "1. The net value on the first day of Dec-
    ember of the preceding year of all outstanding
    policies of life insurance in the company Issued
    prior to the first day of January, 1910, shall
    be computed according to the terms of said poli-
    cies on the basis of the American Experience Table
    of Mortality, and four and one-half per cent ln-
    terest per annum,
       "2 . The net value on the last day of Decem-
    ber, of the precedfng year, of all policies of
    life insurance issued after the thirty-first day
    of December, 1909, upon the basis of the Actuary's
    or Combined Experience Table of Mortality, with
    four per cent interest per annum. The polld es
    of any such life Insurance company thereafter
    issued upon the reserve bas'isof an interest rate
    lower than four per cent shall be computed upon
    the basis of the American Experience Table of
    Mortality with interest at such lower rate per
    annum.
      “3 * In every case In which the actual pre-
   mium charged for an insurance is less than the
   net premium for such insurance computed accora-
   ing toits respective tables of mortalftg and rate
   of Interest aforesaid, the company shall also be
   charged with the value of annuity, the amount of
   which shall equal the difference between the pre-
   mium charged and that required by the rules above
   stated, and the term of which In years shall
   equal the number of future annual payments due
   on the Insurance at the date of the valuation.”
       We have been unable to find any’case where the appellate
courts of this State OP any other jurisdiction have passed up-
on the questions presented in your Inquiry.
       It will be noted that under Article 4734, Vernon’s
Annotated Civil Statutes, that the policies of foreign life
insurance companies mag contain any provisions which the law
of the State, territory, district or county under which the
company Is organized prescribes, when such policies are Issued
Honorable 0. P. Lockhart, page 8          o-5255


 in this State notwithstanding any contrary provision contained
'In Chapter 3, Title~78, Vernon's Annotated Civil Statutes.
 Paragraph 5 of Article 4682; Vernon's Annotated Civil Stat-
utes, provldes in effect that the Board of Insurance Cotnmis-
 sloners of this State may accept the valuation made by the
 Insurance ComnU.ssionerof the State under whose authority the
life Insurance company was organlzed, when such valuation
has been properly made on sound and recognized principles.
The foreign company is required to furnish the Board of In-
 surance Commissioners a certificate of the Insurance Commis-
 sioner of such state. setting forth the value calculated on
the data designated of all the pollcles In force inthe~ cdm-
pany on the previous thirty-first day of~December, and stat-
ing that, after all other debts of the company and claims
against it at the time, and one hundred thousand dollars sur-
plus to policy holders, were provided for and the company had
in safe securities of the character required by the laws of
this State, the amount equal to~the net value of all Its
policies in force, and that such company is entitled to do
business tn its own state.
        Considering the foregoing statutes together, IYls our
opinion that Section 5 of Article 4682, Vernon's Annotated
Clvll Statutes, authorizes the Board of Insurance Commission-
ers of this State to accept for flllng under Article 4749,
Vernon's Annotated Civil Statutes,  life insurance policies
issued by foreign companies doing business in this State Which
contain the valuation clause less liberal to the insured and
more'liberal to the company than that required of Texa.scom-
panies , provided, of course, the provisions of Section 5 are
complied with.
     .'It Is our further opinion that Article 4734,~Vernon's
Annotated CIvll Statutes, in connection with what has hereto'
fore been said in answer to your first question, requires the
Board of Insurance Commissioners to accept for flling~life in-
surance pollcles issued by a foreign company.operating in,Texas
containing a valuation clause specifying a valuation basls.less
liberal to the Insured and more liberal to the company than re-
qulred to Texas companies when such foreign company's home
state has a law requiring the use of such valuation clause by
all companies organized under the provisions of its laws.
       You also asked:
       "What is the situation when such other state
    has.a law similar to Article 3734?"
With reference to this question, hit Is our opinion that although
other states may have laws similar to Article 3734, It would not
Honorable 0. P. Lockhart, page 9         O-5255



affect our answers to the foregoing questions, insofar as val-
uation    policies of foreign life Insurance companies doing
busines In this State is concerned.
                               Yours   very truly
                           ATTORNEY GENEEAL OF TEXAS

                               By s/Ardell Willii%ms
                                    Ardell'Wllllams
                                    Assistant

AW:db:wc

APPROVED MAY 18, 1943
s/Grover Sellers
FIRST ASSISTANT
ATTORNEY GEKERAL
Approved Opinion Committee By s/EWE Chairman
