IAG's net profit plummeted 68% to $110 million for the second half of last year as its insurance margin fell 7.4 percentage points to 5.9%.

Natural disasters wiped $326 million from the insurer's before-tax profits - more than double the $153 million IAG had allowed for the period.

IAG's share price took an initial hammering following Friday's announcement, falling more than 8% by late morning, but recovered to finish the day only 1% down at $3.77.

The insurer also suffered a $55 million hit from widening credit spreads and a $90 million fall in investment returns.

IAG's combined ratio blew out eight percentage points to 100.2%, reflecting an underwriting loss of $7 million compared with a $244 million profit for the previous corresponding period.

Beleaguered CEO Michael Hawker is confident the insurer can recover by raising rates, buying more reinsurance and reducing exposure in unprofitable areas.

"We have started rate increases across all our portfolios and we expect more increases to follow," he said. "We are managing down our exposures in UK private motor and Australian commercial.

"Commercial market prices in short-tail classes remain underwater and at levels that are unsustainable. The market is being cross-subsidised. We are therefore reducing our exposure."

Mr Hawker says increasing rates and growing market share are not mutually exclusive, as he wants to generate "the best mix".

"Clearly we have to put rates up to reflect the underlying risk. We [also] want to maintain a competitive position in the marketplace."

The group's 15% improvement in gross written premium to $3.85 billion was largely attributable to its UK motor acquisitions.

Mr Hawker is confident the UK motor market will start to harden, benefiting IAG's struggling Hastings/Advantage businesses, which it acquired for $350 million last year in the belief the cycle would turn.

"Prices have started to increase in motor lines. We think it's bottoming out and starting to turn."

COO Mike Wilkins admits IAG is still "dealing with governance issues" from Hastings and the group is repositioning its UK motor operations into "bespoke and specialist areas, and away from bulk lines".

Mr Hawker confirms IAG has taken remedial action at Advantage by "increased pricing, changed risk profile and [seeking] a different market segment". But it will take at least 18 months to flow through to the bottom line.

He says the insurer "could not have predicted the storms" in its three key markets of Australia, the UK and NZ.

IAG has factored in a 25% increase on its normal $154 million allowance for adverse weather claims for the second-half of 2007/08.

Mr Hawker expects IAG's insurance margin to recover in the second half to reach the lower end of its 9-11% estimate.

"We expect our second half performance to be double that of the first half."

While reserves again underpinned IAG's Australian results, Mr Hawker says it's "very hard" to see whether the insurer will continue to be able to release reserves at the current levels.