Sydney, Feb 24, 2006 (ABN Newswire) - Insurance Australia Group (ASX: IAG) plans to return AU$200M to shareholders despite a tough local outlook and potential acquisitions in Asia.

Australia's largest car insurer said it had yet to decide whether the capital return to shareholders would be a special dividend of a share buy-back. IAG will deduct an interim dividend of AU$215M from surplus capital of AU$870M.

Though investors welcomed the news, IAG's profit result came in under market expectations, due to under performing premium growth across personal and commercial lines.

Net earned premium, which subtracts reinsurance costs from gross earned premiums, was AU$3.1B. Gross written premium fell from AU$3.3B down to AU$3.2B.

The result was boosted by favorable share market conditions. Investment income rose from last year's AU$285M to AU$345M.

IAG benefited from the absence of large losses due to bad weather but suffered from lower volumes and higher claims in property and construction.

IAG cut guidance on its insurance margin yesterday after recording a 15.2 per cent margin in the half. It expects a full-year insurance margin of 14 per cent to 16 per cent, compared with previous guidance of 13.5 per cent to 16.3 per cent.

Chief executive Michael Hawker said establishing a presence in faster growing markets was a priority against the backdrop of intense competition and unsustainable pricing locally.

"Having a footprint in Asia is critical" he said.

IAG is eyeing further acquisitions in China, Malaysia, Thailand and India, where Mr Hawker expects premium growth of more than 10 per cent a year.

He said that IAG would look to spend 50 per cent of the year's earnings on acquisitions over the next five to eight years to meet its goal of sourcing 40 per cent of income offshore.

IAG presented data that showed its proposed joint-venture partners in China, Malaysia and Thailand earned AU$3B in gross written premiums annually. If IAG completed the purchase of equity stakes in those businesses, it would equate to AU$812M in gross written premiums.

Mr Hawker also noted the difficulty in predicting premium growth in an intensely competitive market, saying IAG would not lower its prices if it did not adequately reflect the risk.

Mr Hawker reaffirmed that IAG would produce returns on equity that exceeded the insurance market average by 2 per cent to 3 per cent.

IAG's expense ratio increased to 27.1 per cent in the first-half from 26 per cent a year earlier. The company declared a 13.5 cent interim dividend, up 12.5 per cent.

IAG committed to its target of 10 per cent annual growth in dividend payments, but said future dividends would hinge on its Asian expansion plans.

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