What Is an Underwriting Group?

An underwriting group is a temporary association of investment bankers and broker-dealers 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 once the issuance goes public. 

An underwriting group is also called a purchase group, a distributing syndicate, or a syndicate.

Key Takeaways

  • An underwriting group is a temporary association of investment bankers and broker-dealers 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 once the issuance goes public. 
  • The group buys the issuance from the firm first at a specified price and then sells it to the public (as opposed to a company selling the shares directly to investors).
  • Then, the underwriting group resells the issue to investors in order to make a profit; the profit is referred to as the underwriting spread.

How an Underwriting Group Works

An underwriting group manages the distribution of a new securities issue, such as a single company stock or a bond. The group buys the issuance from the firm first at a specified price and then sells it to the public (as opposed to a company selling the shares directly to investors). Then, the underwriting group resells the issue to investors in order to make a profit.

For the issuing company, having an underwriting group means that they are paid upfront for the shares they are issuing. As a result, a significant amount of risk is removed from the issuing company and taken on by the underwriting group. The issuing company no longer has to sell the inventory of its stock directly to investors. The profit or loss for the group is determined by how the new stock performs on the market. (If there is a profit, it 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 group allows investment bankers and institutions to finance a high-volume purchase that would be out of reach for any one banker or institution. However, once all the securities are sold off to investors, there is no reason for the group to exist anymore. At this point, an underwriting group disbands, and the individual bankers and financial entities are free to come together in underwriting groups for other, separate securities issues.

In an underwriting group, there is typically one lead underwriter. The lead underwriter is responsible for dealing with regulatory bodies. The lead underwriter may also receive the largest portion of the issue for distribution.

Underwriting for Investment Banking vs. Underwriting for Insurance

Underwriting has applications in both the investment banking and the insurance sector. However, it means different things in these distinct industries; 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 that is being issued. After this, the shares are resold or distributed to investors. This process is transactional; 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 through 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.