QBE has made what it says is a "final proposal" for IAG that values the takeover target at $8.7 billion.

QBE CEO Frank O'Halloran says the new proposal "is very fair and reasonable given IAG's declining profitability in the past three years and its recent profit downgrade".

The revised cash-and-scrip proposal of 0.145 QBE shares and 90 cents cash values IAG shares at $4.60. IAG Chairman James Strong rejected QBE's previous proposal of 0.142 QBE shares and 70 cents cash as "totally inadequate".This afternoon IAG issued a statement calling the proposal only "marginally revised". It says the board's initial reaction is that "the proposal fell short of fair value".

But Chairman James Strong - who was approached with the revised offer by QBE Chairman John Cloney on Friday - has not rejected the new proposal out of hand. He says IAG is "willing to discuss a takeover proposal on terms that appropriately reflected the value of IAG".

The IAG directors will announce their formal decision on the proposal following a meeting in New Zealand tomorrow. 

Earlier this month IAG was forced to lower its insurance margin for the full year ending June 30 to 6-8% from 9-11%. It also downgraded its estimated gross written premium growth to 5.5-6.5% from 7-9%.

QBE claims the revised proposal represents a 24% premium to IAG's three-month volume-weighted average price before the original proposal was made on April 10.

IAG's share price fell 24c to $4.18 by 12.15pm as the market absorbed the announcement, while QBE's shares lifted 20c to $25.75.

We'll keep you informed on developments.