Underwriting
From Free net encyclopedia
In Banking, Underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower, such as employment history, salary, and financial statements; publicly available information, such as the borrower's credit history, which is detailed in a credit report; and the lender's evaluation of the borrower's credit needs and ability to pay. Underwriting can also refer to the purchase of corporate bonds, commercial paper, U.S. Treasury securities, municipal general obligation bonds by a commercial bank or dealer bank for its own account, or for resale to investors. Bank underwriting of corporate securities is carried out through separate holding company affiliates, called Securities affiliates, or Section 20 affiliates
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Securities underwriting
Securities underwriting is a way of placing a newly issued security, such as stocks or bonds, with investors. A syndicate of banks (the lead-managers), underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, then they end up holding some securities themselves. Underwriters make their income from the price difference, or underwriting spread, between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering. When a dealer bank purchases Treasury securities in a quarterly Treasury bond auction, it acts as underwriter and distributor. Treasury Securities purchased by a primary dealer are held in a dealer bank's trading account assets portfolio, and often resold to other banks, and to private investors.
League tables
Underwriting activity reported in Thomson Financial League Tables ([1]) (numbers in $ billion) (number of issues in parenthesis):
Global Debt, Equity & Equity-related
| Year | Underwriting Activity | Source |
|---|---|---|
| 2004 | 5,693 (20,066) | Q4 2004 report |
| 2003 | 5,326 (19,706 | Q4 2003 report |
| 2002 | 4,257 (14,070) | Q4 2002 report |
| 2001 | 4,112 (NA) | Q4 2002 report |
Insurance underwriting
Underwriting may also refer to insurance; insurance underwriters figure out how risky it is to insure people and businesses. They also decide how much coverage they should receive and how much they should pay for it. Underwriting involves measuring risk exposure and determining the premium with which to insure that risk.
Each insurance company uses its own set of underwriting guidelines in order to determine whether or not the company should accept a proposal. In life insurance this decision process sometimes requires that applicants provide further medical evidence. The underwriters can decide to make a counteroffer in which the premiums have been loaded, or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Some companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing proposals; some such systems are available from reinsurers.
A leading underwriter is insurance broker Lloyd's of London.
Other
Underwriting may also refer to financial sponsorship of a venture.