Q. I received a letter from my agent recommending I cancel my homeowner's policy with Hawaiian Insurance & Guaranty Co. because of a drop in their financial ratings. I'm not sure this is the right thing to do since I understand HIG is still financially viable and that the ratings cut was caused by its parent company's financial problems. If I do cancel the policy I will have to pay the full annual premium up front with another insurer. Would I get a refund on my unused HIG premium for a policy that expires in August?

—M. Magata, Honolulu

A. There's an element of risk with staying with Hawaiian Insurance & Guaranty that you need to assess and consider against what it will cost you to go with another insurer.

HIG was the state's fourth-largest homeowners insurance company at the start of the year, with about 33,000 policies. But its Alabama-based parent company, Vesta Insurance Co., was slammed by losses from hurricanes the past two years and in March ratings agency A.M. Best downgraded Vesta's financial strength ratings to C++, or marginal, from B, or fair.

The rating, which signals an insurer's ability to meet obligations of policyholders, also applied to Vesta's subsidiaries. Some insurance brokers and mortgage lenders have sent letters advising clients to switch from HIG to other insurers. About 3,000 policyholders have jumped to other insurers.

"It's just one of those things where they feel for us, but it's just our rating," said HIG President Ernest Fukeda Jr.

Vesta has been looking for ways to get a cash infusion to boost its finances and explored a sale. Its status also is a concern to state insurance regulators.

"We are all monitoring the situation very closely because if they aren't able to put this together, the various states will likely have to move to take over supervision of the company," J.P. Schmidt, Hawai'i insurance commissioner, said yesterday. He said Vesta has lined up a buyer, but needs to consummate a deal shortly.

His advice: "It's very important to talk to your insurance agent to consider your alternatives. Because of the problems with HIG's parent company, there are some real concerns at this point."

The shame of this is that a profitable local company that employs 22 is being dragged down by problems occurring elsewhere. Vesta bought HIG in 1995 from the state, which earlier took it over because of losses it sustained from 1992's Hurricane Iniki.

Fukeda said the company still had the assets and reinsurance to meet claims. Reinsurance policies providing up to $200 million of coverage will expire at the end of this month, but are expected to be renewed, he said. "We have enough funding for day-to-day claims and reinsurance to cover catastrophes," he said.

Fukeda said HIG's homeowner rates haven't been raised in five years and are lower than some competing insurers in the Hawai'i market. Refunds are available for unused portions of canceled policies but are assessed a penalty, he said.

Schmidt said at this point he is satisfied HIG has enough to pay claims though noted the situation is subject to change.

"If a good reinsurance contract can't be renegotiated, that presents a real problem for everyone," he said.

Schmidt said he also has taken steps to get HIG money previously deposited in Mainland banks sent back to Hawai'i so there are assets available locally, if he had to take over supervision of the company.

Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or gwiles@honoluluadvertiser.com