What Is an Underwriting Group?

What Is an Underwriting Group?

Let me explain what an underwriting group is. It's a temporary association of investment bankers and broker-dealers who come together to buy a new issue of securities from an issuer, with the goal of distributing those securities to investors and making a profit. You should know that this group shares the risks involved and helps ensure the new securities issue distributes successfully once it goes public.

You'll also hear this called a purchase group, a distributing syndicate, or simply a syndicate.

Key Takeaways

Here's what you need to remember: An underwriting group forms temporarily when investment bankers and broker-dealers want to purchase a new securities issue from an issuer and then distribute it to investors for profit. They share the risks and support the distribution process after the issuance becomes public. The group buys the securities from the issuer at a set price first, rather than the company selling directly to investors, and then resells them to the public. That resale generates profit, which we call the underwriting spread.

How an Underwriting Group Works

An underwriting group handles the distribution of a new securities issue, like stocks or bonds from a single company. They buy the issuance from the issuer at a specified price upfront and then sell it to the public, instead of the company dealing directly with investors. From there, the group resells the securities to investors to turn a profit.

For the issuing company, this setup means they get paid immediately for the shares they're issuing, which removes a lot of risk from their side and shifts it to the underwriting group. The company doesn't have to sell its stock inventory directly to investors anymore. The group's profit or loss depends on how the new stock performs in the market—if there's a profit, it's the difference between what they paid and what they resell it for, known as the underwriting spread.

By forming this temporary group, investment bankers and institutions can finance large purchases that one entity couldn't handle alone. But once all the securities are sold to investors, the group has no further purpose and disbands. The individual bankers and entities can then join other groups for different securities issues.

Typically, there's a lead underwriter in the group who handles dealings with regulatory bodies and might get the largest share of the issue to distribute.

Underwriting for Investment Banking vs. Underwriting for Insurance

Underwriting applies in both investment banking and insurance, but it means different things in each field, and an underwriting group in banking isn't the same as in insurance.

In investment banking, underwriting involves teaming up with other financial entities to buy large volumes of a new security being issued, then reselling or distributing those shares to investors. This is a transactional process where groups form temporarily to handle a specific security's purchase and sale.

In insurance, underwriting is about calculating risks, payouts, and costs for insuring various objects, situations, or entities. It can be done by individuals or groups, and these groups might last over long periods, handling multiple contracts and policies with different policyholders. Their main role isn't pooling funds for securities but assessing risks to set the right rates for insurance policies.