pro forma insurance, built line by line.

The seller’s insurance expense is a historical number. The pro forma number is what the program costs once you own the business, at today’s payroll, revenue, and vehicles, with the limits your lender and capital partners require.

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what will insurance cost on a pro forma, run-rate basis after we buy this company?

The short answer. Pro forma insurance cost is the annual premium the company will carry under your ownership, built line by line as rate times today’s exposure (payroll by class, revenue, vehicles, property values) under the go-forward limits, deductibles, and experience mod, not the seller’s last invoice or trailing ledger expense. Show it as a bridge from historical expense, and keep one-time items such as premium audits, tails, and collateral out of the run rate.

By Nick McClish, Managing Partner · 7 min read · Reviewed October 28, 2026

what are the key takeaways?

1
Run rate is today’s program.
Annualize the in-force policies at current exposure. That is the floor, before any change you plan to make.
2
Pro forma is your program.
Add the limits, lines, and structure the deal requires, and remove what the seller’s owner or parent provided.
3
One-time stays out.
Audit true-ups, tails, and collateral belong in sources and uses or working capital, not the run rate.

what is the difference between historical, run-rate, and pro forma insurance cost?

Deal teams use three different insurance numbers, often in the same meeting, and they rarely match. Name each one before anyone argues about the total.

Three insurance numbers in a deal. Definitions used on this page.
Number	What it measures	Where it comes from	Common trap
Historical expense	What the books recorded over the trailing twelve months	General ledger insurance accounts	Mixes two policy years, audit bills for older terms, claim payments, and finance charges
Run-rate premium	What the in-force program costs for a full year at today’s exposure	Declarations, rating worksheets, and current payroll, revenue, vehicle, and property schedules	Uses the estimate printed on the policy instead of the payroll the company runs now
Pro forma premium	What the program costs under your ownership and your deal terms	Run rate plus the changes the deal requires, each supported by an indication	Treating an indication as a quote, or a hoped-for saving as a fact

The quality of earnings provider decides where each number lands in adjusted EBITDA. The insurance work is to make every number traceable to a policy, an exposure figure, and an owner. Where each item usually lands is in insurance in the quality of earnings.

why doesn’t the seller’s insurance expense equal the run rate?

Policy years do not match fiscal years. A policy that renews mid-year puts two terms, with two rates and two exposure estimates, inside one trailing-twelve-month figure.
Audits land late. Workers’ comp and many general liability policies are priced on estimated payroll or sales and settled on actual figures after the term ends. NCCI explains that when audited payroll is larger than the up-front estimate, additional premium is due at audit, and a smaller payroll produces a return. NCCI, September 30, 2020. An audit bill booked this year belongs to an earlier policy year.
Estimates drift. If the company grew and never updated its payroll estimate, the in-force premium understates what today’s exposure costs. Pennsylvania’s rating bureau puts the rule plainly: final earned premium is determined on actual, instead of estimated, payroll. PCRB Basic Manual Rule XV.
Claims hide in the account. Deductible reimbursements and retention payments are sometimes coded to insurance expense. They are loss cost, not premium, and they move with claims, not with rates.
Some cost sits elsewhere. Premium finance interest, surplus lines taxes and fees, and policies paid by an owner, a parent company, or a PEO may live in other accounts or outside the company entirely.

how do you build the run-rate insurance line, step by step?

List every in-force policy: line, insurer, term, limits, deductible or retention, premium, taxes and fees, and rating basis.
Pull the rating basis for each line from the declarations or rating worksheet: payroll by class code and state for workers’ comp, sales or payroll for general liability, vehicle count and type for auto, and insured values for property.
Replace each estimate with today’s exposure: trailing payroll by class and state, current revenue, the current vehicle schedule, and current replacement values. Ask the CFO which figures the business will actually run next year.
Apply the in-force rate to today’s exposure, line by line. Keep the workers’ comp experience mod as its own factor, because it changes on its own schedule.
Add taxes, fees, and policy minimums, and annualize any short-term policy.
Reconcile the result to the trailing ledger and explain every difference in one bridge.

That is the run rate. It is still the seller’s program at today’s size. The next step turns it into yours.

what changes turn the run rate into a pro forma number?

SEC Regulation S-X Article 11 governs pro forma statements in public filings, not private deals, but its categories are a useful discipline. It separates adjustments that reflect the transaction, adjustments that depict a business as an autonomous entity, and optional management adjustments for synergies and dis-synergies, each of which needs a reasonable basis. 17 CFR 210.11-02. Insurance has items in each category.

Categories borrowed from Article 11 as a planning frame. Not an accounting conclusion.
Category	Insurance examples	Evidence that supports it
Deal-driven changes	Limits raised to the credit agreement or capital partner standard, D&O for new board seats, cyber or employment practices added after diligence	Lender insurance exhibit, term sheet, board composition, and an indication for each new line
Standalone changes	Lines a parent or owner carried on its own program that end at close, owner-paid vehicles or property, a PEO or captive arrangement that stays with the seller	The parent’s allocation schedule, the transition services agreement, and a standalone indication
Synergies	Moving the company onto a sponsor portfolio program, or consolidating overlapping policies after an add-on	A written indication. Until an insurer prices it, a saving is a hypothesis
Dis-synergies	A higher deductible that moves cost into retained losses and collateral, an experience mod that follows the operations, a market that reprices the class	Bureau ownership determination, collateral terms, and current indications

Keep synergies and dis-synergies on separate lines. A capital partner can underwrite a premium increase with a lender exhibit behind it. A saving with no quote behind it gets discounted, and it should.

The workers’ comp mod deserves its own line. NCCI explains that the mod usually compares the latest available three years of an employer’s payroll and loss data with similar employers, and that the current policy is not used in the calculation. NCCI, ABCs of Experience Rating. An ownership change is reported on the bureau’s form, which in NCCI states is the ERM-14. Do not model a new mod until the bureau answers. The full treatment is in the experience mod guide.

what stays out of the run rate?

Common one-time insurance items. The purchase agreement and the QoE provider decide the final treatment.
Item	Why it is not run rate	Where it usually goes
Premium audit true-up on an expired policy	Settles a past policy year	Debt-like item or working capital, per the purchase agreement
D&O, E&O, or cyber tail bought at close	One payment for pre-close acts	Sources and uses at closing
Collateral for a deductible program	Security for losses, not premium	Balance sheet and liquidity, with release terms listed
Short-term policy bought for the sale process	Will not repeat	Adjusted out
Deductible payments on open claims	Loss cost tied to specific claims	Reserve, escrow, or specific indemnity discussion
R&W insurance premium	A transaction cost	Sources and uses, with the payer set by the purchase agreement

Tail decisions are covered in exit-ready insurance and the D&O tail. Open claims and their retentions are covered in open litigation in insurance due diligence.

what does a pro forma insurance bridge look like?

Hypothetical illustration, not a client. Figures are invented.
Bridge line	Hypothetical amount	Why it moved	Owner
Trailing insurance expense per the ledger	$540,000	Starting point	QoE team
Remove audit bill for the prior workers’ comp term	minus $38,000	Belongs to an expired policy year	QoE team
Remove deductible payments coded to insurance	minus $22,000	Loss cost, not premium	CFO
Restate workers’ comp and general liability to current payroll and revenue	plus $46,000	Two new crews; the estimate was never updated	Broker and CFO
Run-rate premium for the seller’s program	$526,000	Subtotal	Broker
Umbrella raised to the lender’s minimum	plus $31,000	Deal-driven, per indication	Sponsor and lender
Cyber and employment practices added	plus $27,000	Deal-driven, per indication	Sponsor
Owner’s personal vehicles moved off the company auto policy	minus $9,000	Standalone clean-up	CFO
Pro forma premium before any synergy	$575,000	Subtotal	Broker
Portfolio program saving the sponsor hopes for	Not included	No quote yet, so shown only as a sensitivity	Sponsor

In this example the pro forma line is $35,000 above the ledger, and everyone can see why. The line worth debating is the umbrella minimum, not the total.

who wrote this guide?

Nick McClish, Managing Partner, Riza Risk

Nick McClish is Managing Partner of Riza Risk, a licensed insurance agency. He founded and sold Pluto Pet Insurance, and he was the first U.S. hire at ManyPets, where he led global growth and the U.S. launch as premium grew from $33M to $280M. He raised and led a search fund, founded Day One Growth, and holds an MBA from London Business School.

good to know.

Straight answers to what deal teams ask about pro forma and run-rate insurance cost in an acquisition.

Is pro forma insurance cost the same as the seller’s insurance expense?

No. The ledger mixes policy years, audit bills for older terms, and claim payments. Pro forma cost is the annual premium under your ownership at today’s exposure and deal terms.

How do you calculate run-rate workers’ comp premium?

Apply the in-force rate for each class code to current payroll in that class and state, apply the experience mod, then add state charges and fees. Use the payroll the business runs now, not the estimate on the policy.

Should a portfolio program saving go into adjusted EBITDA?

Only with support. The QoE provider decides, and a saving without an insurer’s indication is a hypothesis. Show it as a separate line or a sensitivity.

Is a premium audit bill part of the run rate?

A true-up for an expired term is separate from the forward run rate. But the higher payroll or sales behind it may be recurring, so restate future premium to actual exposure. The QoE provider decides whether any historical expense adjustment is appropriate.

Where does a D&O tail go in the model?

Sources and uses at closing. The purchase agreement decides who pays.

When should the pro forma insurance line be built?

In exclusivity, before the QoE draft and before price is locked. A late number usually arrives as a surprise at the credit committee.

see it in dollars before you sign.

Riza helps turn program facts into dollars a deal team can use. Placement, if any, is a separate step.

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