IAG profit up but home, car cover to rise

INSURANCE Australia Group expects premiums for home and car insurance to rise by up to 10 per cent over the next 12 to 18 months, as it passes on the growing cost of meeting claims.

After recording a strong bounce in profits during the latest half, IAG said on Thursday that the cost of meeting claims continued to rise faster than inflation.

The costs from recent flooding and bushfires were within its allowances, but chief executive Mike Wilkins said "underlying longer-term cost trends" were likely to result in higher prices. "On a blended basis we could see prices moving in the 5-to-10-per cent range," Mr Wilkins said. The price pressure was not due to any individual event, but was being caused by continuing rises in costs such as salaries.

His comments came after IAG handed down earnings of $461 million in the six months to December, more than triple the result in the prior corresponding period.

The result was helped by strong growth in earnings from its core Australian and New Zealand operations, which helped expand group profit margins from 7.7 per cent to 19.9 per cent. Its Asian businesses, which include investments in Thailand, Malaysia, China and Vietnam, contributed almost 6 per cent of gross revenue from premiums.

IAG, the group behind the NRMA, RACV and CGU brands, is the nation's biggest insurer of cars and homes.

Australian consumers are generally regarded as less likely to shop around for insurance than customers in some other countries, and analysts expect IAG will be able to pass on most of its price rises.

But an analyst at Nomura, Toby Langley, said that if wage growth were to slow it could result in increased "consumer activism" with individuals becoming more discerning about their insurance policies.

Investors welcomed the latest bounce in profits, lifting IAG shares by 15¢, or 2.8 per cent to $5.57.

Mr Langley said the strong reaction to IAG's profit result might have been influenced by the strength of its earnings from premium increases.

"The market seems to have underestimated the benefit of price rises that IAG has managed to put through its business in recent periods," Mr Langley said.

The bounce in earnings helped increase the group's capital ratio above its own benchmarks, but Mr Wilkins said that any talk of capital management, such as a special dividend, was "premature".