Australia's IAG cuts margin, premium growth forecasts

MELBOURNE (Reuters) - Insurer and takeover target Insurance Australia Group Ltd (IAG.AX) (IAG.AX) lowered its insurance margin forecast for fiscal 2008 to 6-8 percent due to storm costs and widening credit spreads.

IAG, which has rejected a takeover approach by larger QBE Insurance Group Ltd (QBE.AX), also cut its full-year forecast for growth in gross written premiums to 5.5-6.5 percent from 7-9 percent.

It is the second time this year that IAG has cut its outlook for growth in premiums.

The market's reaction to the downgrade suggested that investors considered it less likely that QBE would have to raise its offer of cash and shares, worth A$7.9 billion ($7.4 billion) based on Monday's trading, to win over IAG investors.

IAG's shares fell as much as 3.7 percent, while QBE shares rose as much as 1.3 percent. That put IAG's shares just 2 percent above QBE's offer, down from a premium of 5 percent last week.

White Funds Management portfolio manager Angus Gluskie said QBE had cleverly landed its offer at a time when IAG's earnings were set to struggle for six to 12 months.

"I would suggest QBE timed their offer in the knowledge that IAG was likely to have to downgrade their outlook," Gluskie said.

IAG Chairman James Strong stood by the group's rejection of QBE's offer.

"Notwithstanding today's announcement, the board continues to be of the view that QBE's proposal is inadequate because of the inherent and long-term value in IAG -- its brands, market penetration and unique scale," Strong said in a statement.

IAG said bigger weather losses than expected and deteriorating investment markets had weakened insurance margins by 1.6 percentage points so far, while worsening conditions in the UK car insurance market had also hurt the outlook.

IAG said in February it expected an insurance margin at the low end of 9-11 percent, in the event of no large losses outside its allowances.

The group is looking for ways to cut costs, with savings of A$16 million expected in New Zealand this year and A$7 million shaved next year by cutting head office costs. It increased its targeted cost savings in the UK by 8 percent to 27 million pounds ($53.6 million).

It is also shifting its focus in the United Kingdom, where it has increased provisions for higher claims in private motor and home insurance. It plans to revamp its range of products and focus on speciality cars, which have a higher insurance margin.

($1=A$1.07)

($1=0.5040 Pound)

(Reporting by Sonali Paul; Editing by Tomasz Janowski)