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Commercial insurance prices are still falling, and one insurance executive puts the blame on a competitor.

Pricing "borders on the irrational," as one big insurer "not allowed to spend taxpayer money on compensation" is instead "spending it on ridiculously low prices," in effect using its taxpayer bailout to cover the costs of underpricing, said Edmund F. Kelly, chief executive of mutual commercial insurer Liberty Mutual Group Inc.

He didn't name the company but most likely was referring to American International Group (AIG), which had its executive pay cut this week as part of a compensation overview for companies that received extraordinary government bailouts.

Kelly repeated comments that he and other insurers have made in recent quarters--that one insurer, usually unnamed but clearly referring to AIG, is setting insurance prices below the level needed to cover costs and forcing prices down industry-wide in the process.

Commercial insurance prices have been falling for more than two years, which has also been attributed to an excess of capital in the insurance industry and more recently to the weak economy and shrinking U.S. businesses.

Kelly compared the commercial insurance market to a bar, where customers stagger in and out.

The complaints of underpricing triggered an investigation into AIG's pricing earlier this year by the U.S. Government Accountability Office. In a preliminary report in March, the GAO said it didn't find evidence that AIG used its government bailout to cut insurance prices.

In a report last week, U.S. pay czar Kenneth R. Feinberg said he cut compensation of AIG's top employees by $28.4 million under an examination mandated for the seven companies that received large amounts of money from the Troubled Asset relief Program, or TARP.

According to the GAO, AIG's outstanding balance of government assistance was $120.7 billion at the beginning of September, of total authorized aid of $182.3 billion.

An industry survey conducted in October by UBS Investment Research found that most risk managers surveyed put pricing by Chartis, AIG's commercial property/casualty insurer, about in line with competitors. An AIG spokeswoman said Chartis wasn't unreasonably cutting its prices.

Liberty Mutual, which offers commercial and personal-lines insurance, was in line with other insurers that reported a jump in third-quarter earnings.

Liberty Mutual reported net third-quarter income of $265 million, nearly double the year-ago figure. In contrast to soft commercial-insurance pricing, Kelly said the company has been raising homeowners and auto-insurance prices. Its net written premiums in its private-passenger auto-insurance business jumped 27.8% in the quarter to $2.58 billion from the year-ago quarter, while workers-compensation premiums dropped 13.6% to $992 million, signaling a weak U.S. economy.

Net written premiums for the quarter rose 10.1% to $7.21 billion.

The company's combined ratio, a measure of underwriting profitability, worsened in the quarter. The total amount of premiums collected that were paid out in claims and expenses, excluding catastrophes and incurred losses from prior years, rose three percentage points to 97.9% in the quarter from the year earlier.

-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750 4141; lavonne.kuykendall@dowjones.com