Insurance Australia Group has upgraded its profit guidance for the year to June, pumped up by reserve releases and strong performance from its domestic arms.

IAG, which owns major insurance brands NRMA and CGU, revised its fiscal 2014 reported insurance margin to 14.5 to 16.5 per cent - up from the pervious 12.5 to 14.5 per cent.

The group however lowered its revenue, or gross written premium guidance by 2 per cent. IAG now expects to post 3 to 5 per cent GWP growth, down from the previously flagged 5 to 7 per cent.

IAG’s improved results come on the back of strong reserve releases, which involve funds set aside for claims that are no longer needed and pumped back into the company ­balance sheet.

“While our financial results for 1H14 remain subject to finalisation, including board approval, we expect to record a strong first half underlying performance which builds on the improvement evident in prior periods,” IAG boss Mike Wilkins said.

“The reported result is also expected to benefit from higher than originally anticipated reserve releases.”

Mr Wilkins said the group anticipated reporting an insurance margin of around 17.5 per cent for the six months to December with the company’s profit results next month.

Commonwealth Bank insurance analyst Ross Curran said: “IAG have come out with a very strong insurance margin in the first half.”

“The margin beat was mainly driven by reserve releases on their long tail business. This demonstrates that the company has been conservative in its pricing in recent years,” Mr Curran said.

While the profit was a positive, Mr Curran cautioned investors should not “extrapolate reserve releases into perpetuity”.

“The company should normally deliver 1-2 per cent reserve releases a year and 4 per cent is unusually high,” he said.

The update comes a month after IAG revealed it would lob a $1.85 billion takeover bid for retail behemoth Wesfarmers’s insurance underwriting division.

The deal is expected to propel IAG to the top of the insurance game in Australia and New Zealand, making the company the biggest insurer in Australia. The transaction would also make IAG the country’s biggest commercial insurer, beating competitor QBE and the No. 1 motor insurer, with a combined 38 per cent market share.

IAG expects to complete the acquisition in the second quarter of 2014 after receiving the green light from the competition regulators in Australia and New Zealand.

The insurer’s latest profit guidance update does not include any contributions from the Wesfarmers’s business, the statement to the ASX said.

IAG’s tilt at Wesfarmers’s insurance arm is widely seen as a strategic move to kill one of its biggest threats – Coles Insurance. The sale includes a 10-year distribution deal to sell insurance products through Coles.