April 23 (Bloomberg) -- Liberty Mutual Group Inc. agreed to buy Safeco Corp. for about $6.2 billion, taking advantage of a 32 percent drop in the insurer's stock in the past year to strike the industry's biggest transaction in the U.S. since 2004.

Liberty Mutual, owned by its policyholders, will pay $68.25 a share in cash for Safeco, 51 percent more than yesterday's closing price, the companies said in a statement today. The purchase will create the fifth-largest U.S. property and casualty insurer, the biggest deal since St. Paul Cos. and Travelers Property Casualty Corp. combined in a $17.9 billion merger.

Safeco's sale may signal the start of an industry consolidation predicted on April 14 by consulting firm Accenture Ltd. after insurance stocks fell 15 percent in the first quarter. The Seattle-based insurer tumbled after its auto unit posted a loss at the end of 2007 because of rising medical claims and repair costs, leading to the first annual decline in profit in six years.

``A private player, Liberty Mutual, thinks the valuation of companies like Safeco are much higher than they're currently trading at,'' said Paul Newsome, an analyst at Sandler O'Neill & Partners LP, in an interview with Bloomberg Television. ``It certainly would seem to be a positive sign for more mergers and acquisitions at higher levels than we've seen.''

Safeco climbed $20.71, or 46 percent, to $65.94 at 4:15 p.m. in New York Stock Exchange composite trading. Safeco last closed at the deal's $68.25-a-share purchase price in February of 2007.

``It wasn't right for Safeco to go it alone any more,'' Chief Executive Officer Paula Rosput Reynolds, 51, told employees, according to a regulatory filing. ``We, in fact, needed to join up with a global player.''

West Coast

Liberty Mutual will add automobile, home and business customers in most U.S. states, including those on the West Coast where Safeco has its greatest market share. The purchase is expected to be completed by the end of the third quarter.

``They are a well-known and established brand,'' said Liberty Mutual CEO Ted Kelly, 62, in an interview. ``They have a significant footprint west of the Mississippi, whereas our agency market is much stronger east of the Mississippi.''

About 65 percent of Safeco's business involves sales of auto and home coverage, while Liberty Mutual has more of a focus on commercial coverage sold through agents, Kelly said. ``It's very complementary.''

Combined, the two companies would become the fifth-largest insurer of homes and cars in the western U.S. with a 5 percent market share, according to an analysis by SNL Financial. Boston- based Liberty Mutual alone is 13th in the region, with a 1.9 percent share of the market. The merged company would also rank as the second-largest insurer of commercial auto fleets nationwide, SNL said.

`Troubled Times'

About 71 percent of analysts tracking insurers of homes, cars and businesses expect a ``significant increase'' in mergers in 2008, Accenture said in its report. Accenture interviewed 108 stock analysts in December and January.

``In troubled times, companies that can afford it try to pick up deals,'' John Del Santo, director of Accenture's North American insurance practice, said in an interview this month. ``We've seen a lot of discussion activity at a lot of different companies.''

Liberty Mutual's fourth-quarter profit declined 6.6 percent to $425 million as prices for commercial insurance dropped. The insurer spent about $1.01 on claims and expenses for every dollar it collected in premiums.

Industrywide, commercial insurance rates in the U.S. fell 14 percent in the first quarter from the same period a year earlier as companies competed for market share, according to a survey by the Council of Insurance Agents and Brokers.

Commercial Customers

Liberty Mutual last year purchased competitor Ohio Casualty Corp. for $2.7 billion to boost sales to commercial customers through independent agents.

An insurance merger frequently results in the combined company losing some customers, said Meyer Shields, an analyst with Stifel Nicolaus & Co. in Baltimore.

``For Safeco's competitors, this is probably good news,'' Shields said in an interview. ``Some will be seen as the next takeout target. For others, they'll be able to catch some of those customers who don't stick around. An agent will look at the combined customers that have policies with Safeco and Liberty Mutual and say I don't want all my business with this big company.''

Mercury General, SeaBright

Mercury General Corp., identified today by KBW Inc. analyst Cliff Gallant as one of his ``top picks'' as a takeover target, rose $2.14, or 4.6 percent, to $48.35. Los Angeles-based Mercury General's largest market is California.

SeaBright Insurance Holdings, based in Seattle, climbed 5.4 percent, and Hanover Insurance Group Inc. advanced 4.8 percent. Both were among the companies highlighted by Gallant.

Liberty Mutual will keep selling coverage under the Safeco brand, Kelly said, and the insurer's name will remain on the baseball stadium used by the Seattle Mariners. He said it was too soon to know whether Liberty Mutual would cut jobs at Safeco.

Discussions of a possible deal began when Kelly called Reynolds last year, he said. ``We had a protracted discussion over the better part of six months,'' he said.

Reynolds, named the 48th most powerful woman in the world by Forbes magazine last year, took the top post at Safeco in 2006 as competition to sell coverage to drivers was increasing industrywide.

`All in One Day'

``Paula Reynolds' track record as an insurance executive wasn't great,'' Shields said. ``Her track record as a value creator for shareholders will be remembered as pretty good. It was all in one day, but it worked.''

Reynolds said in an interview the company's recent improvement wasn't appreciated by investors and analysts.

Liberty Mutual ranked sixth based on 2007 property and casualty policy sales in the U.S., according to the National Association of Insurance Commissioners.

Lehman Brothers Holdings Inc. advised Liberty Mutual. Safeco was advised by Morgan Stanley.

To contact the reporter on this story: Erik Holm in New York at Eholm2@bloomberg.net

Last Updated: April 23, 2008 17:40 EDT