Liberty Mutual Group Inc., said yesterday that profits dropped 8.7%, blaming falling rates and a decline in private equity investments.

The policyholder-owned insurer that purchased Safeco Corp. last year, saw its second-quarter net income decline to $274 million from $300 million in the same period a year earlier, the Boston-based insurer said today in a statement. And policy sales excluding results at its Safeco unit slipped about 12% to $5.55 billion, according to a Bloomberg report.

During a conference call with investors, CEO Edmund “Ted” Kelly admitted that the economic “contraction” had impacted commercial lines.

“Our underwriters continue to display good discipline and are walking away from inadequately priced business,” he said.

According to the Council of Insurance Agents and Brokers, Washington, D.C., the rates charged industry-wide for U.S. commercial insurance declined 4.9% in the second quarter.

A private equity loss of $20 million compares with a profit of $58 million in the same period a year earlier. Excluding the partnership holdings and realized investment losses, the firm earned $427 million before taxes, a 22% increase from a year earlier, when the Safeco deal had yet to be completed, said Bloomberg. Since then, the insurer has cut its holdings of Citigroup Inc. and Goldman Sachs Group Inc. in the first quarter by more than half.

During the call, Kelly said that Liberty Mutual cut back on the amount of new workers’ compensation coverage it sold because it considered the prices charged by competitors to be inadequate. Insurers classically claim they won’t cut rates to unprofitable levels and then proceed to do so, he said.

“The industry has traditionally been like an alcoholic who swears off drink until it reaches the next saloon,” Kelly said. “And that hasn’t changed.”

Liberty Mutual plans to hold the line on pricing and pass on business it considered to be underpriced, Kelly said.

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