WHAT IS Underwriting Group
An underwriting group is a temporary association of investment bankers who wish to purchase a new issue of securities from an issuer in order to distribute the issue to investors at a profit. The underwriting group shares the risk and aids in the successful distribution of the new securities issue.
An underwriting group is also called a purchase group, distributing syndicate or syndicate.
BREAKING DOWN Underwriting Group
An underwriting group manages the distribution of a new securities issue, such as a single company stock or a bond. The group purchases the issue from the issuing corporation at a specified price and then resells the issue to investors in order to make a profit. The profit is the difference between the purchase price and the resale price. This difference is also known as the underwriting spread.
Coming together temporarily as an underwriting groups allows investment bankers and institutions to finance a high-volume purchase that would be out of reach of any one banker. Once all the securities are sold off to investors, however, there is no reason for the group to exist anymore, so it disbands, and the individual bankers and financial entities are free to come together in underwriting groups for other securities.
Underwriting Group in Investment Banking vs Insurance
Underwriting is common in both investment banking and insurance, but means different things in these different industries, so an underwriting group is a different entity in investment banking than in insurance. In investment banking, underwriting is the process of joining together with other financial entities to purchase large volumes of a new security and then resell, or distribute, them to investors. This process is transactional, and underwriting groups come together for a temporary amount of time to buy and then sell a specific security.
In the insurance industry, underwriting is the process of calculating risk and payouts, and calculating the costs of purchasing insurance for different objects, situations and entities. Insurance underwriting can be done by a group or an individual, and an underwriting group can exist over long periods of time and multiple contracts and policies with a variety of policyholders. The main function of an insurance underwriting group is not to pool funds to purchase securities, but to do calculations of risk and determine the correct rate for an insurance policy. Mortgage underwriting serves the same function as insurance underwriting does.