AM Best has revised the outlook from ‘stable’ to ‘negative’ for the long-term issuer credit rating (ICR) of Terra Insurance Company, in addition to affirming the financial strength rating of ‘A’ (Excellent) and the long-term ICR of ‘a+’ (Excellent). Best attributes the revisions to Terra’s balance sheet strength, which they consider ‘very strong’, in addition to its ‘very strong’ operating performance, limited business profile, and appropriate enterprise risk management (ERM). The agency says the negative outlook on Terra’s long-term ICR reflects pressure on the insurer’s operating performance assessment, which has begun diverging from other ‘very strong’ assessed rating units, according to Best. These ratings stem from a decline in Terra’s results over the past two years due to an increase in expenses driven by inflation, the rising costs of facultative reinsurance, and limited premium growth. Best says the company continues to report strong pre-tax operating gains and overall net income, despite a decline in underwriting income in recent years. The agency attributes Terra’s declining operating margins predominantly to the sharp increase in facultative reinsurance costs that have increased more than corresponding increases in gross premium. Their overall exposure remains unchanged, despite these rising costs, as it has no exposure over US$2 million. Terra’s balance sheet strength assessment is supported by its risk-adjusted capitalisation, which remained at the strongest level, measured by Best’s capital adequacy ratio (BCAR) at the end of 2024. Terra’s limited business profile reflects its narrow spread of underwriting risk and limited opportunities to expand premium writings. Moreover, a strong reinsurance initiative is in place to cover the severity of any claims from both the design and engineering industries.
