The cutless bearing holds the propeller shaft where it leaves the hull, in the stern tube or the P-bracket. It's a brass or composite tube with a grooved rubber lining, lubricated by the water flowing through it. As the lining wears, the shaft gets room to move, the propeller hammers the bearing, and the vibration travels up the shaft to the coupling and the gearbox.
How a surveyor checks it
With the boat out of the water, Practical Sailor's test is simple: grab the propeller or shaft and give it a couple of good, firm shakes. Slight movement, about 1/16 inch, is borderline. A visible wiggle, or a thunk you can hear, means it's due.
Look at the ends of the bearing where you can see the lining. Practical Sailor points to uneven wear, on top at one end and on the bottom at the other, as a sign of significant shaft misalignment. Check the bearing shell is tight in its bracket and the bracket is tight on the hull.
On the sea trial, Good Old Boat's other sign: vibration when in gear.
What decides the grade
How loose it is, and what's loose. A shaft that knocks, or a bearing moving in the bracket, is an A. A visible wiggle or a thunk is a B, to change at the next haul-out. Slight play with even wear is a C to watch.