AM Best has revised the outlook to negative from stable for the Long-Term Issuer Credit Rating (Long-Term ICR) and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICR of “a+” (Excellent) of Terra Insurance Company (A Risk Retention Group) (Terra) (Williston, VT). The outlook of the FSR is stable.

The Credit Ratings (ratings) reflect Terra’s balance sheet strength, which AM Best assesses as very strong, as well as its very strong operating performance, limited business profile and appropriate enterprise risk management (ERM).

The negative outlook on Terra’s Long-Term ICR reflects pressure on the insurer’s operating performance assessment. Operating performance metrics have begun to diverge gradually from other “very strong” assessed rating units. This followed 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. While underwriting income has slipped in recent years, the company continues to report strong pre-tax operating gains and overall net income. Also, Terra’s declining operating margins are mainly from the sharp increases in facultative reinsurance costs that have increased more than corresponding increases in gross premium. While reinsurance costs have risen, Terra’s overall exposure remains unchanged as it has no exposure over $2 million.

Terra’s balance sheet strength assessment is supported by its risk-adjusted capitalization, which has remained at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), at year-end 2024. Other balance sheet strength considerations include favorable underwriting and reserve leverage measures, exceptionally strong liquidity, positive cash flows, low common stock leverage and expertise as a niche professional liability writer.

Terra’s limited business profile reflects its narrow spread of underwriting risk and limited opportunities to expand premium writings. An ERM assessment of appropriate reflects the company’s risk management program, which is centered around a peer review process and focused on limiting loss costs. This is in addition to a strong reinsurance program, which is in place to cover the high severity of any claims from the design and engineering industry.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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