The state, worried about the crumbling finances of Hawaiian Insurance & Guaranty's Mainland-based parent company, took over the local insurer yesterday, saying it hopes to find a new owner for the business.

State Insurance Commissioner J.P. Schmidt will oversee operations of Hawaiian Insurance, or HIG, after obtaining a state court order allowing him to rehabilitate the company. Schmidt said there would be no changes in rates for HIG's 29,000 policyholders.

The state's action ends some of the uncertainty surrounding HIG, which started the year as Hawai'i's fourth-largest insurer of homes. In recent months it lost about 4,000 customers because of the financial woes of Vesta Fire Insurance Corp., an Alabama-based insurer hit hard with losses from Gulf Coast and Florida hurricanes over the past two years.

Schmidt said he decided to take action when Vesta's board took too long trying to sell the company. He now is working with other insurance regulators in Texas, Alabama and Florida to negotiate a sale of Vesta, or parts of it, including HIG.

"We hope that because we are going to move along quickly that this will not have an adverse impact on any policyholders," Schmidt said. "And that we are able to get HIG back in a good financial position in a short period of time."

The state advised HIG policyholders to discuss the situation with insurance agents or other insurers if they have questions about coverage or want to consider other options.

In recent weeks Schmidt made sure Vesta had money from Hawai'i premiums deposited in local banks. Yesterday he took over those assets, saying he needed to protect policyholders, creditors and others.

Ernest Fukeda Jr., HIG president and chief operating officer, said he will report to Schmidt, who will have a say in the company's big decisions. One of Schmidt's first actions was to line up $125 million of reinsurance to help HIG cover catastrophes.

Fukeda said the company still has enough assets to cover day-to-day claims. Fukeda lamented the parent company's Mainland problems because locally the company had been in good shape and had provided reasonable rates on its hurricane coverage.

"It's unfortunate," he said. "Over the past six years that I've been here we've more than doubled our position here."

HIG's standing, however, began eroding in March when independent rating company A.M. Best downgraded Vesta and its subsidiaries' financial strength ratings to C++, or marginal, from B, or fair.

That resulted in local insurance agencies and mortgage companies recommending clients switch their hurricane and homeowner's coverage to different insurers. It also caused problems for the local hurricane insurance market because Zephyr Insurance Co., the state's largest provider of hurricane insurance for homeowners, stopped accepting some older homes for the coverage.

Since then, other insurers have entered the market, including Colorado-based International Catastrophe Insurance Managers LLC, or ICAT.

This is the second time HIG has come under the state's oversight. The first time occurred in 1992, when the state took it over after parent company Hawaiian Electric Industries said it couldn't operate it in the face of mounting losses from Hurricane Iniki.

The state eventually rehabilitated HIG and sold it to Vesta in 1995 for $35 million.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.