Loss ratios — the carrier-durability indicator.

A loss ratio is the percentage of earned premium a carrier pays back out in claims — claims paid divided by premiums earned. The number expresses how profitable the agency's placed business is for the carrier, and it's calculated carrier by carrier, which makes it the underwriting scorecard each carrier uses to decide whether to renew, expand, or revoke the appointment. For the buyer of an agency, that scorecard is the forward-looking quality measure: a clean book earns preferred status and broader binding authority, a poor book earns rehabilitation notices and eventually termination.

§ 01 · The 60% thresholdThree bands, one heuristic.

Across most property-and-casualty and life-and-health carriers, 60% is the benchmark that separates healthy books from problem books. It isn't a hard rule — carriers adjust it by line of business and market cycle — but it's the default number every underwriter carries in their head, and the one every buyer should carry in theirs.

A book in the healthy band is an asset the carrier wants to protect. A book in the rehabilitation band is not a bargain — it's a liability, because the carrier is already moving toward the exit. The caution band tolerates individual years but punishes a trend, so the shape of the line matters more than any single point on it.

§ 02 · The lookback and the top fiveTrend over point, carrier over blend.

One year of loss-ratio data is noise; three to five years is signal. Weather events, one-time large claims, and reporting lag all distort a single year, which is why every serious buyer requests carrier-issued production reports across at least three prior years. A flat sub-60% line is ideal; a rising trend warns about underwriting discipline even while still inside the acceptable band; a line that bounces between 40% and 85% suggests concentrated risk on a handful of accounts. Pay particular attention to the most recent year, because carriers set next-year commission and binding authority off current results — a book with three clean years and one bad recent one may be about to lose contingency eligibility, a hidden revenue cut the seller hasn't priced.

The analysis is carrier-by-carrier, and most agencies concentrate the majority of revenue in their top three to five carriers — so the minimum package is three to five years of production reports from each of the top five. An 85% loss ratio on a ninth-ranked carrier holding 2% of revenue is bounded; the same 85% on the number-one carrier is deal-altering. Segment by line of business too: a healthy blended number can mask the one line in distress, and the line carrying the growth story is the one whose loss ratio is load-bearing.

§ 03 · How loss ratio reaches EBITDAThe contingency linkage.

Contingency bonuses — the profit-sharing carriers pay when a book performs — are indexed directly to loss ratio, and they drop almost entirely to the bottom line. Many small agencies derive 10% to 20% of revenue from contingency, so a two-point move in loss ratio, say from 58% to 62%, can erase eligibility entirely and cut EBITDA by a comparable margin. That makes loss-ratio diligence and contingency diligence the same work: any projection of future contingency has to be anchored to a realistic loss-ratio assumption and stress-tested against a small adverse shift. Rehabilitation and probation are the other downstream consequence — both are written-record events that live in carrier correspondence, not seller decks, so the buyer who skips the carrier file review misses them.

§ 04 · The ticking time bombConcentration × loss ratio.

Carriers act decisively on poor-performing concentrated books because they have more to lose by tolerating them — restricted binding, rehabilitation notices, and outright termination all arrive faster on a concentrated relationship than on a diversified one. The red-zone flag is any carrier above 20% of revenue running a multi-year loss ratio above 65%. That book doesn't have a loss-ratio problem; it has a revenue problem that is one carrier action away from arriving, and the buyer who fails to model the interaction walks into a cliff the financial statements never forecast.

◆