VHI Healthcare, the State-owned health insurer, has reported a record surplus of €70.3 million for the year to the end of February.

Despite this strong financial performance, the insurer also confirmed yesterday that it has notified the Minister for Health, Mary Harney, of its intention to increase premiums by an average of 8.5 per cent.

Some €34.7 million of the €70.3 million surplus was generated from day-to-day operations, and the remainder arose from the release of funds from the company's risk reserves.

VHI also reported that premium income broke the €1 billion mark for the first time, rising from €919,600 to €1.02 billion, and its membership grew by 20,000 to a record level of 1.57 million subscribers.

The company's operating cost ratio fell from 8.5 per cent to 8.1 per cent, indicating increased operational efficiency, and chief executive Vincent Sheridan described VHI as "the most efficient health insurer in the market".

Although the insurer's solvency ratio increased from 23.2 per cent to 27.1 per cent, this is still far below the solvency requirement of 40 per cent which VHI will face from December 2008 onwards.

"We think that's far too high," Mr Sheridan said. He added that VHI is trying to convince the Irish Financial Services Regulatory Authority to reduce this requirement level.

In recent years, VHI has diversified its product range beyond health insurance, and income from these new revenue streams rose from €27.3 million to €40 million.

A new Bill due to come into force in autumn will extend the range of activities that VHI can participate in, and Mr Sheridan said the company intended to take advantage of these extended powers though he declined to specify what these new activities might include.

In relation to its price increase proposal, the company said yesterday that the key contributory factors included the increasing cost of healthcare, as well as the cost of new facilities and better diagnostic procedures.

"We have to ensure that we facilitate quality healthcare," Mr Sheridan said.

"People are being kept alive in 2007 who would have died in 2006 or 2005, because of advances in medication," he added.

He maintained that VHI's premiums would still be low in relation to other countries.

The proposed price increase will come into effect on September 1st unless rejected by the Minister for Health, but VHI is confident that the Minister will not intervene.

"It is unlikely that the Government will get involved," Mr Sheridan said.

"The Government appreciates that we know our own business, and that our only objective is to keep premiums as low as possible."

The price rises would increase the annual premium faced by adult on Plan B by €52.06 to €664.66, while the cost for a family on Plan B would rise by €142.02 to €1,813.16.