Attorney General Opinion WW-0435

2O.!,c: TIIE ATIVB~EY GENEKAL ~PTE~As Hon. William A. Harrison Commissioner. of lamrance~ State Board of Iusurance Austin 14, Texas Dear Mr. Harrima: c+hxLHo..ww-435 Re:. Ar&::3.39; ~&tion 4, 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 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~tock at 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 APPROVED: OPINION COMMITTEE: Geo. P. Blackburn, Chairman Mary K. Wall .I. Milton Richardson Fred B. Werkenthin Very truly yours, WILL WILSON i;rnmzs C. Dean Davis Assistant REVIEWED FOR THE ATTORNEY GENERAL BY: W. V. Geppert