Small insurers are grappling with extreme pricing pressure on policies and a wave of automobile accident and natural disaster claims (the former, we do not doubt, caused by subprime consternation – and perhaps even the latter). But this trend has an upside: more deals for 2008 and a silver lining for one major U.S. auto and home insurer.

Liberty Mutual, the auto and home insurer, on Wednesday agreed to buy Safeco for $6.2bn in a deal that creates the fifth largest-US property and casualty insurer and could herald further consolidation in the industry.

Boston-based Liberty Mutual is paying $68.25 per share in cash to acquire Safeco, a 51 per cent premium to the Seattle-based insurer’s closing price on Tuesday of $45.23. It is the largest insurance industry deal since St. Paul merged with Travelers in a $16bn deal in 2003.

More deals are expected in 2008 as smaller insurers struggle to cope with intense pricing pressure on policies and a rising number of automobile accident and natural disaster claims.

The deal will give Liberty, currently the sixth biggest US property and casualty insurer, a bigger presence on the west coast. It will also rescue a struggling Safeco, which has been hit by stronger competition to write auto insurance and big payouts for losses in the California wildfires.

Safeco in January reported a 30 per cent drop in first quarter profit to $144.5m. The auto insurance division reported a pretax underwriting loss of $19m. Liberty had direct written premium of $20.2 billion last year while Safeco had $5.9 billion.

Safeco shares rose 46 per cent in midday trade to $66.11. Liberty is a mutual company owned by its policy holders.

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