UPDATE 2-Australia's IAG eyes profit slump, raises A$450 mln

* sees big drop in H1 profit

* raises A$450 million via institutional placement

* new funds to add financial flexibility in tough market (Adds details of equity raising)

SYDNEY, Feb 18 (Reuters) - Australia's top car and home insurer, IAG (IAG.AX), forecast a sharp drop in first-half profit on weak investment returns, and raised A$450 million ($287 million) via a share placement to give it financial flexibility.

Insurance Australia Group Ltd (IAG.AX) cut its full-year insurance margin forecast to 6 percent from 10 percent due to widening credit spreads and to reflect a rush of claims from this month's devastating bushfires in southern Australia that killed 200 people.

The insurer reiterated that underlying gross written premium growth would be 3-5 percent.

Funds from the equity raising, via an institutional placement at A$3 a share -- a 13.3 percent discount to Tuesday's close -- will be used to improve the capital mix and provide additional financial flexibility, IAG said.

The company was initially seeking to raise A$400 million via the institutional placement, with another A$100 million through a retail offer. The institutional placement was raised to A$450 million due to strong demand, IAG said, adding it would soon announce an offer for shareholders that would be no more than the A$3 a share paid by institutions.

Goldman Sachs JBWere was the sole underwriter, a source with direct knowledge of the matter said.

IAG expects to report on Feb. 26 its July-December net profit slumped to just A$4 million from A$110 million a year earlier.

In December, IAG agreed to sell its mass distribution businesses in the UK for about A$165 million.

Shares in rival QBE Insurance Group Ltd (QBE.AX) fell 5.4 percent on Wednesday, while the broader benchmark S&P/ASX 200 index .AXJO ended down 1.5 percent. IAG was put on a trading halt to undertake the placement.

IAG's downbeat forecast follows Suncorp Metway Ltd's (SUN.AX) disappointing earnings earlier this month. Suncorp also announced plans to raise up to A$1.3 billion in new equity.

Australian insurers have been battered by the bushfires, and heavy floods in Queensland and New South Wales.

Several Australian companies, from mall operator Westfield Group (WDC.AX) to Qantas Airways Ltd (QAN.AX), have rushed to tap shareholders for cash in recent weeks as tight credit conditions closed off access to debt markets. ($1=A$1.58) (Reporting by James Regan and Denny Thomas, Editing by Ian Geoghegan)