Rating agency A.M. Best Co. put a cloud over Terra Nova's proposed merger yesterday by setting its financial strength rating "under review with negative implications''.

And the rating powerhouse left a question mark on the financial strength, debt and preferred stock ratings of the US-based niche insurer Markel Group -- which plans to buy Terra Nova in the $905 million deal announced on Monday.

A.M. Best joined a bevy of other rating agencies in their hesitant reaction to the proposed merger deal which NYSE-listed insurer Terra Nova has said was unsolicited.

Markel is to assume $175 million of Terra Nova's debt under the cash and stock deal which is Markel's latest in a string of ambitious take-overs.

"The negative implications reflect the uncertainty regarding the ultimate structure of the financing and the impact it will have on financial leverage and interest coverage at the holding company level,'' A.M. Best said.

But there were also pluses to the deal.

"This transaction will provide the newly combined organisation with greater scale and scope of business and operations in various countries worldwide.

"It creates a solid platform for the organisation to take advantage of favourable market developments through the combination of two well capitalised entities with common underwriting and reserving philosophies.'' The ratings review will end when details of the financing structure are known.

Standard & Poor's also put its ratings on Markel Corp. Group and related entities on "CreditWatch with negative implications''.

This follows their move last Thursday to place Terra Nova's ratings on "CreditWatch with developing implications'' after the company's announcement that it was considering a take-over bid.

"S&P believes integration risk is significant given the size of Terra Nova, which wrote $646 million of net premiums at year-end 1998.

"The successful integration of Terra Nova, Markel's largest purchase to date, will be formidable given the group's relatively recent acquisition of Gryphon Holdings Group, whose operations Markel is currently re-underwriting.'' And the agency points out that Markel already faces considerable pressure from "standard and alternative market entities in the specialty insurance market, where conditions remain highly competitive''.

But S&P conceded the Terra Nova deal had advantages as it would expand Markel's insurance operations by adding product and geographic reach.

It would also diversify the merged group's distribution network and operating earnings as well as creating cost savings.

"Although debt leverage will increase Markel's financial flexibility is expected to remain very good supported by solid interest coverage,'' the agency concluded.

Another agency, Duffs & Phelps Credit Rating Co., put all fixed income and claims paying ability ratings of Markel on "Ratings watch - down''.

This status reflected the uncertainty related to the ultimate financing of the acquisition, the agency said.

But if financing allows Markel's financial leverage to quickly return to management's long-term target of one-third debt and two-third's equity, then the ratings will likely be reaffirmed at current levels.