underwriter

noun
un·​der·​writ·​er | \ ˈən-dər-ˌrī-tər How to pronounce underwriter (audio) , ˈən-də- \

Definition of underwriter

1 : one that underwrites : guarantor
2a : one that underwrites a policy of insurance : insurer
b : one who selects risks to be solicited or rates the acceptability of risks solicited
3 : one that underwrites a security issue

Examples of underwriter in a Sentence

Recent Examples on the Web Among the IPOs where Goldman Sachs was an underwriter over the last two years in the U.S. and Europe, fewer than 10% currently have a board lacking a diverse candidate, the company said. Jeff Green, Bloomberg.com, "Goldman to Refuse IPOs If All Directors Are White, Straight Men," 8 May 2020 Henry Chu, 41, insurance underwriter, New York City: My wife was scheduled to be induced on Tuesday March 24th. Garrett M. Graff, Wired, "Birth, Death, Weddings: An Oral History of Covid-19 Disruptions," 27 Mar. 2020 Goldman Sachs is the lead banker and an additional underwriter is KKR, which helped Endeavor with its $4 billion acquisition of UFC. Paul Bond, Billboard, "Hollywood Agency Endeavor Files to Go Public," 24 May 2019 As part of the Texan Title family, South Land has access to it own underwriter, Texan Title Insurance Co. Kamco Holdings purchased a 17,653-square-foot retail center at 3422 Business Center Drive in Pearland. Katherine Feser, Houston Chronicle, "Retail wrap: Mendocino Farms Sandwich Market, Spenga fitness, Emler Swim School ink new locations," 6 Mar. 2020 The United States is the largest underwriter of the organization. Dominick Mastrangelo, Washington Examiner, "Pelosi rips Trump's 'weak' deflection of coronavirus blame to WHO," 15 Apr. 2020 Wells Fargo is hiring underwriters, processors and closers into their fulfillment group and moving existing employees into their fulfillment operation. NBC News, "With mortgage rates at record lows, banks and brokers scramble to deal with refinancing rush," 14 Mar. 2020 Bear Stearns was the largest underwriter of securities backed by home loans, products that tumbled in value and set off the crisis -- creating huge liabilities. Yalman Onaran, Bloomberg.com, "Bear Stearns Lives On Inside JPMorgan," 16 Mar. 2018 The bank was the biggest underwriter of IPOs in the U.S. and Europe last year. Kiuyan Wong, Bloomberg.com, "Goldman's Diversity Pledge Won't Apply to Boards in Asia," 24 Mar. 2020

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'underwriter.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

See More

First Known Use of underwriter

1622, in the meaning defined at sense 1

Keep scrolling for more

Learn More about underwriter

Time Traveler for underwriter

Time Traveler

The first known use of underwriter was in 1622

See more words from the same year

Statistics for underwriter

Last Updated

23 May 2020

Cite this Entry

“Underwriter.” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/underwriter. Accessed 29 May. 2020.

Keep scrolling for more

More Definitions for underwriter

underwriter

noun

Financial Definition of underwriter

What It Is

In the securities industry an underwriter is a company, usually an investment bank, that helps companies introduce their new securities to the market.

In the insurance business, an underwriter is a company liable for insured losses in return for a fee (premium).

How It Works

When a company wants to issue stock, bonds, or other publicly traded securities, it hires an underwriter to manage what is often a long and complex process.

To begin the offering process, the underwriter and the issuer first determine the kind of offering the issuer needs. Sometimes the issuer wants to sell shares via an initial public offering (IPO) cash proceeds return to the issuing company as capital to fund its projects.  Other offerings, such as secondary offerings, funnel the proceeds to a shareholder who is selling some or all of his or her shares. Split offerings occur when a portion of the offering go to the company while the rest of the proceeds goes to an existing shareholder. Shelf offerings allow the issuer to sell shares over a two-year period.

After determining the offering structure, the underwriter usually assembles what is called a syndicate to get help manage the minutiae (and risk) of large offerings. A syndicate is a group of investment banks and brokerage firms that commit to sell a certain percentage of the offering. (This is called a guaranteed offering because the underwriters agree to pay the issuer for 100% of the shares, even if all the shares can't be sold). With riskier issues, underwriters often act on a "best efforts" basis, in which case they sell as many shares as they can and return the unsold shares back to the issuing firm.

After the syndicate is assembled, the issuer files a prospectus. The Securities Act of 1933 requires the prospectus to fully disclose all material information about the issuer, including a description of the issuer's business, the name and addresses of key company officers, the salaries and business histories of each officer, the ownership positions of each officer, the company's capitalization, an explanation of how it will use the proceeds from the offering, and descriptions of any legal proceedings the company is involved in.

With prospectus in hand, the underwriter then proceeds to market the securities. This usually involves a road show, which is a series of presentations made by the underwriter and the issuer's key executives to institutions (pension plans, mutual fund managers, etc.) across the country. The presentation gives potential buyers the chance to ask questions from the management team. If the buyers like the offering, they make a non-binding commitment to purchase, called a subscription. Because there may not be a firm offering price at the time, purchasers usually subscribe for a certain number of shares. This process lets the underwriter gauge the demand for the offering (called indications of interest) and determine whether the contemplated price is fair.

Determining the final offering price is one of the underwriter's most important responsibilities. First, the price determines the size of the capital proceeds. Second, an accurate price estimate makes it easier for the underwriter to sell the securities. Thus, the issuer and the underwriter work closely together to determine the price. Once an agreement is reached on price and the SEC has made the registration statement effective, the underwriter calls the subscribers to confirm their orders. If the demand is particularly high, the underwriter and issuer might raise the price and reconfirm this with all the subscribers.

Once the underwriter is sure it will sell all of the shares in the offering, it closes the offering. Then it purchases all the shares from the company (if the offering is a guaranteed offering), and the issuer receives the proceeds minus the underwriting fees. The underwriters then sell the shares to the subscribers at the offering price. If any subscribers have withdrawn their bids, then the underwriters simply sell the shares to someone else or own the shares themselves. It is important to note that the underwriters credit the shares into all subscriber accounts (and withdraw the cash) simultaneously so that no subscriber gets a head start.

Although the underwriter influences the initial price of the securities, once the subscribers begin selling, the free-market forces of supply and demand dictate the price. Underwriters usually maintain a secondary market in the securities they issue, which means they agree to purchase or sell securities out of their own inventories in order to keep the price of the securities from swinging wildly.

Why It Matters

Underwriters bring a company's securities to market. In so doing, investors become more aware about the company.  Issuers compensate underwriters by paying a spread, which is the difference between what the issuer receives per share and what the underwriter sells the shares for. For example, if Company XYZ shares had a public offering price of $10 per share, XYZ Company might only receive $9 per share if the underwriter takes a $1 per share fee. The $1 spread compensates the underwriter and syndicate for three things: negotiating and managing the offering, assuming the risk of buying the securities if nobody else will, and managing the sale of the shares. Making a market in the securities also generates commission revenue for underwriters.

As we mentioned earlier, underwriters take on considerable risk. Not only must they advise a client about matters large and small throughout the process, they relieve the issuer of the risk of trying to sell all the shares at the offer price. Underwriters often mitigate this risk by forming a syndicate whose members each share a portion of the shares in return for a portion of the fee.

Underwriters work hard to determine the "right" price for an offering, but sometimes they leave money on the table. For example, if Company XYZ prices its 10 million share IPO at $15 per share but the shares trade at $30 two days after the IPO, this suggests that the underwriter probably underestimated the demand for the issue. As a result, Company XYZ received $150 million (less underwriting fees) when it could have possibly fetched $300 million.  Thus, the issuing company must also follow a robust due diligence process on their end in order to optimize their capital raising efforts.

Source: Investing Answers

underwriter

noun
un·​der·​writ·​er | \ ˈən-dər-ˌrī-tər How to pronounce underwriter (audio) \

Legal Definition of underwriter

1a : a person (as an individual or a company) who underwrites an insurance policy : insurer
b : a person who assesses risks to be covered by an insurance policy
2 : a person (as an individual or company) who underwrites a security issue — compare issuer

Note: The Securities Act of 1933 requires dealers, issuers, and underwriters to file registration statements for the securities that they sell.

Keep scrolling for more

More from Merriam-Webster on underwriter

Thesaurus: All synonyms and antonyms for underwriter

Rhyming Dictionary: Words that rhyme with underwriter

Spanish Central: Translation of underwriter

Nglish: Translation of underwriter for Spanish Speakers

Comments on underwriter

What made you want to look up underwriter? Please tell us where you read or heard it (including the quote, if possible).

WORD OF THE DAY

See Definitions and Examples »

Get Word of the Day daily email!

Test Your Vocabulary

May 2020 Words of the Day Quiz

  • a blooming wisteria tree
  • Which is a synonym of exiguous?
Spell It

Can you spell these 10 commonly misspelled words?

TAKE THE QUIZ
Citation

Test Your Knowledge - and learn some interesting things along the way.

TAKE THE QUIZ
Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!