Zephyr Insurance Co., the state's largest hurricane insurance company, is being sold for $31.5 million to a group that includes local investors.

Kingsway Financial Services Inc. of Toronto yesterday announced it had signed a definitive agreement to sell Zephyr to a buyer consisting of East Coast insurer Ocean Harbor Holding Inc. and MP Holdings LLC, a Honolulu-based firm linked to the MacNaughton Group, a real estate development and retail company.

The sale comes about four years after Kingsway bought Zephyr, which provides hurricane coverage to more than 70,000 clients in Hawai'i. Zephyr is based in Honolulu and employs 17 staffers who will be retained in the purchase.

During the first half of the year Zephyr had gross premiums written of $36 million. Kingsway said it expects the transaction to close in the fourth quarter pending regulatory approvals.

Richard Toyama, Zephyr president and chief executive officer, said the sale could be beneficial to the company's customers and that the staff will remain intact.

"We have planned for this change and will continue providing uninterrupted service." said Toyama in a statement. "We believe the change in ownership will allow us to further enhance our product and service."

State Insurance Commissioner J.P. Schmidt said he has been in communication with the buying group, Zephyr Acquisition Co., and started reviewing the buyer's business plans and finances.

"So far we have a positive view but we want to look at it closely because Zephyr is such an important company to Hawai'i," Schmidt said. He said Ocean Harbor has experience in the New York and Florida insurance markets, while he viewed the local investor group's participation as a plus.

Schmidt said maintaining a healthy market for private companies offering hurricane insurance is important for the state. That includes recruiting new insurers to write hurricane coverage while promoting the state's market to reinsurance companies that can help spread risk.

He said Hawai'i hasn't had to supplement the market by establishing government-backed plans such as those in Florida, Texas and Louisiana.

Kingsway bought Zephyr in 2005 saying it was a well-run company that could help it diversify. The company has lost money through the first half of the year and had previously talked about selling some of its non-automobile related business.

Kingsway said the sale of Zephyr, founded in 2000, could yield more than the $31.5 million, with a contingent, deferred earn-out amount set as part of the deal.

MP Holdings' incorporation papers list two partners at the MacNaughton Group, Ian MacNaughton and Jeff Arce, as managers.

Messages left for MacNaughton and Arce were not immediately returned yesterday.