IAG this morning downgraded its insurance margin due to wild weather and the subprime credit crunch. But it remains adamant that QBE’s offer for the group doesn’t balance up against its future prospects.

The embattled insurer has lowered its insurance margin for the full year ending June 30 to 6-8% from 9-11%. It has also been forced to downgrade its estimate of gross written premium growth to 5.5-6.5% from 7-9% as its commercial arm, CGU, sacrifices volume for profit.

But Chairman James Strong remains bullish despite the downgrades. In a statement to the Australian Stock Exchange this morning, he continued to push the line that the QBE proposal is inadequate.

“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,” he said.

Claims resulting from storms in Mackay and the southern states cost IAG $135 million in the year to early April. And the group predicts weather-related claims of $56 million for the second half of the financial year, reducing its insurance margin by 0.8%.

Widening credit spreads have knocked a further $55 million off IAG’s insurance profit, affecting its insurance margin by another 0.8%.

CEO Michael Hawker also says the insurer’s long-term profitability remains strong. “Our performance in FY08 does not reflect our long-term prospects and underlying profitability,” he said in today’s statement.

“It reflects the current weakness in insurance cycles in our core markets, higher than normal frequency of severe weather events and the mark-to-market impact of volatile investment markets.”

IAG is pushing up rates, reallocating its investment portfolio and “rebalancing” its UK motor business away from private motor and towards specialty niche business.

At 11 o’clock this morning, IAG’s share price had dropped 6c to $4.32 in initial trading as investors reacted to the earnings downgrade.