Insurance Trivia: The 1933 Run on the National Surety Company

Did You Know? 

In case you missed it, this month we saw something very rare and pretty alarming: A true “run” on a large US bank. Silicon Valley Bank saw $42 billion of withdrawals in one day, which, per Axios, makes it the largest bank run in history. Take that, Bailey Bros. Building & Loan! 

But we’re an insurance rewards app (that automates saving you money on your policies), so why do we care about a “bank run?” Because we care about you! And we're nerds about insurance! So that means that we wanted to figure out if there is such a thing as an “insurance company run.” And it turns out: Yes, there is! 

So What’s The Deal?

The American economy was in a *bad way* in the late 1920s. Stock prices were in freefall; one-fifth of the nation’s banks had failed; and something called the Smoot-Hawley Tariff Act was causing steep declines in international trade. All of this (plus, sadly, much more) caused a lot of pandemonium and eventually the Great Depression. And amidst the mess, home prices plummeted and people started to default on mortgages. Sound familiar? 

Well it didn’t to the executives at the National Surety Company, because this was the 1920s and they never had probably never seen The Big Short (2015). But why exactly was National Surety, an insurance company of a sort, impacted by mortgage rates?

The answer resides partly in its name: a surety refers to a contract between three parties that financially guarantees the principal will act to fulfill whatever terms are established by the bond. The “surety” in this relationship takes the risk for this fulfillment — in exchange for payment. 

This can be a good business to be in! National Surety provided insurance for lots of events: boards fulfilling their fiduciary duties, robbery prevention, and even the completion of the Hoover Dam. The company also offered sureties for mortgage-backed securities (ain’t that a tongue-twister?), specifically on the financial performance of these MBS. And they wrote a lot of them — by December 1928, National Surety was guaranteeing the performance of nearly 0.5% of all mortgages in the country.

You probably see where this is going. As Americans started to default on their mortgages, it began to dawn on National Surety that they were in a lot of trouble. They quickly tried to mitigate the damage with a few creative solutions: They asked individual bondholders to extend or delay the deadlines for the payments due on the mortgage bonds. They even offered replacement bonds with a higher interest rate and a later maturity date. Unfortunately, none of that worked. 

By April 1933, customers and shareholders were pretty nervous, the rumor mill was churning, and the run was building. In less than a month, customers had canceled 25% of all of National Surety’s policies, entitling them to a refund. National Surety was responsible for these payouts, but it didn’t have the cash. 

Seeing the company wouldn’t be able to meet its obligations, New York state regulators stepped in and took over, in large part because National Surety was deemed a systemically important insurance company (once again: sound familiar?). From there, the company was split into two and slowly liquidated. Unfortunately, no outside additional capital could be secured, so policyholders were paid out over time as the company’s assets were sold off. 

Now What?

This drama would play out nearly exactly 80 years later with AIG. Just as National Surety saw its sureties go belly up, so too did AIG’s sureties (known as credit default swaps). Same problem, new name. AIG, like National Surety, was declared systemically significant and saved by the US government. 

Now it’s 2023, so we’re only 70 years away from the next big one, give or take. We joke, but in the meanwhile, you’ll want to keep yourself and your assets protected. That’s why we made Marble, where you can store your insurance, shop for new policies, and stay organized — all while earning rewards. Sign up today! 

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