In re the Report on Examination of Hardware Mutual Insurance Co. of the Carolinas, Inc.

MOORE, Justice. On appeal to this Court, petitioner presents the following questions: “I. Did the North Carolina Commissioner of Insurance commit prejudicial and reversible error in admitting into evidence North Carolina Department of Insurance Exhibit No. 8, the transcript of a conference held in the office of the North Carolina Commissioner of Insurance on October 31, 1969? “II. Did the North Carolina Commissioner of Insurance commit prejudicial and reversible error in admitting into evidence the opinion testimony of Charles F. Glover and George E. King,. witnesses on behalf of the North Carolina Department of Insurance? “III. Is the decision of the North Carolina Commissioner of Insurance supported by substantial evidence? “IV. Are the findings and conclusions set forth in the decision of the North Carolina Commissioner of Insurance correct and in accordance with the applicable North Carolina insurance statutes?” We do not deem it necessary to decide the first and second questions involved. Conceding arguendo that the admission of North Carolina Department of Insurance Exhibit No. 8 and the opinion testimony of Charles F. Glover and George E. King, admitted over petitioner’s objection, was error, the error was harmless. There is ample substantial and uncontradicted evidence to support the Commissioner’s findings of fact. G.S. 58-9.3 provides that on appeal to Superior Court the case is heard upon the transcript of the record for review of the findings of fact and errors of law only, and if the decision of the Commissioner of Insurance is supported by substantial evidence, “the decision is presumed to be correct and proper.” The determinative questions then are: (1) Was there substantial evidence to support the Commissioner’s findings of fact? (2) If so, did the Commissioner err in his conclusion of law that the $160,000 invested by petitioner in the common stock of HMC Corporation was not such investment as would constitute an admitted asset of the petitioner? [674] The answers to these questions require an examination and interpretation of certain provisions of Chapter 58 of the General Statutes relating to insurance as applied to the facts in this case. Ralph N. Farmer, the president of both the petitioner and HMC Corporation, testified that HMC Corporation was a wholly owned subsidiary of petitioner, and that in December 1968 petitioner sold its home office building in Charlotte to HMC for $325,000 and sold its office furniture and fixtures to HMC for $34,740. After the sale of the Charlotte property, petitioner still owned the real estate which it had purchased from Pathway Mutual Insurance Company of Florida in 1968 at an actual cost of $151,467.40. At the time of the Pathway purchase, petitioner owned and was carrying as an admitted asset its real estate in Charlotte at a valuation of $179,869. The Charlotte and Pathway real estate combined gave a total real property holding valued at $331,336.40. (According to the reappraisal of the Charlotte property, the combined total would have been $496,467.40.) As of 31 December 1967, petitioner’s balance sheet showed admitted assets of $1,907,667.06. Ten per cent of the admitted assets would be $190,766.70. Clearly, the combined value of the Charlotte and Pathway real estate exceeded 10% of petitioner’s admitted assets. Petitioner contends that G.S. 58-79.1 (d) (4) allows it to hold the controverted stock. The statute in pertinent part reads: "... Nothing contained in this subdivision shall be deemed to prevent any investment in the stock, bonds or other securities of a corporation organized exclusively to hold and operate real estate acquired by such insurer in accordance with and subject to the provisions of subsection (c), ...” This allows a company to invest in the stock of its wholly owned subsidiary subject to the provisions of subsection (c) of G.S. 58-79.1. Provisions (8) a and b are the parts of subsection (c) applicable to the case at bar. G.S. 58-79.1 (c) (8) a and b states: “(c) Classes of Reserve Investments. — The reserve investments of every domestic stock and mutual insurance [675] company, other than a life insurance company or a fraternal benefit association, shall consist of the following: “ (8) Eeal estate only if acquired or used for the following purposes in the following manner: “a. The land and the building thereon in which it has its principal office or offices. “b. Such as shall be requisite for its convenient accommodation in the transaction of its business.” This provides that a company’s reserve investment can consist of real estate but only if used for the company’s principal office or for its convenient accommodation in the transaction of its business. However, specifically under subsection (e) of G.S. 58-79.1 a company cannot even acquire real property for the above purposes if the value of the acquired property, together with all the real property held by the company, exceeds 10% of its total admitted assets. G.S. 58-79.1 (e) in pertinent part provides: “ ... No domestic stock or mutual insurance company, other than a life insurance company or fraternal benefit association shall hereafter acquire any real property of the kind or kinds specified in paragraphs a and b of subdivision (8) of subsection (c), if the value of such real property, together with the value of all such real property then held by it, exceeds ten percentum of its total admitted assets except as more specifically provided in this section.” (The exception provided for is not applicable to the present case.) The 10% prohibition in G.S. 58-79.1 (e) prevents G.S. 58-79.1 (d) (4) from applying in the present case. G.S. 58-79.1 (f) provides that any mutual insurance company is required to dispose of any investment acquired in violation of the law, and the amount of the value of such investment in excess of the limitation shall be deducted as an unadmitted asset. This section in pertinent part is as follows: “ . . . [I]n any determination of the financial condition of any such insurer, the amount of the value of such investments, if wholly ineligible, or the amount of the value [676] thereof in excess of any limitation prescribed in this section, shall be deducted as an unadmitted asset of such insurer.” Further, G.S. 58-79.1 (h) (5) provides that the stock of a subsidiary of an insurer shall be valued on the basis of the value of only such of the assets of such subsidiary as would constitute lawful investments for the insurer if acquired or held directly by the insurer. Mr. Farmer testified that as president of petitioner he had knowledge that petitioner’s real estate holding exceeded the statutory limit of 10%, and that the office furniture and fixtures of petitioner had never been carried by petitioner as an admitted asset. Under G.S. 58-79.1 (f), the excess over the 10% real property limitation would be deducted as an unadmitted asset. It should also be noted that the $160,000 investment in the common stock of HMC, which represented the ownership of real property, would together with real property still owned by petitioner also exceed the 10% limitation imposed by the statute. Further, HMC’s sole assets consisted of real estate and office furniture and fixtures which, if held directly by petitioner, would not have been admitted assets of the petitioner. Under the express terms of G.S. 58-79.1 (h) (5), the stock which petitioner held in its subsidiary, HMC, must be valued on the basis of the value of only such of the assets of such subsidiary as would have constituted lawful investment if acquired or held directly by the petitioner. In view of petitioner’s other real estate holdings, none of the assets of HMC would constitute a lawful investment for petitioner. Hence, the stock in HMC would have no value as an admitted asset of petitioner. For the reasons stated, we hold the Insurance Commissioner correctly concluded that petitioner’s investment in the wholly owned subsidiary, HMC Corporation, would have enabled the petitioner to convert unadmitted assets into admitted assets, and in so doing evade the real property limitation provided by law for appellant insurance company. We further hold the Commissioner correctly concluded that under these circumstances it would not be in the public interest to consider the company’s investment in its wholly owned subsidiary as an admitted asset. [677] The judgment of the Superior Court affirming the decision of the Commissioner of Insurance is proper and is hereby affirmed. Affirmed.