* UK unit to see further losses in H2
* Shares fall as much as 5.3 pct
* Cuts FY insurance margin guidance to 9-11 pct (Adds share opening, fund manager quote, detail)
By Narayanan Somasundaram
SYDNEY, Feb 14 (Reuters) - Insurance Australia Group , the nation's top home and car insurer, warned its first-half net profit will more than halve and cut its full-year insurance margin outlook as its UK operations struggled and weather claims mounted.
The warning sent in IAG shares down as much as 5.3 percent to A$3.58 in early trade, the stock's lowest level in over four months, and at 0000 GMT, it was down 4.5 percent, underperforming a 0.7 percent rise in the broader market and a 0.8 percent rise by rival QBE .
"Last time around it appeared the UK losses were contained, now it appears not and leads to a credibility issue," Paul Xiradis, Chief Executive at fund manager Ausbil Dexia said.
"Notwithstanding that, (the UK unit) is a poor business, a drag on earnings and a real problem for IAG," Xiradis said.
IAG said it expected a net profit of A$161 million ($162.8 million) for the six months to December, down from A$329 million a year ago and also well below analyst expectations for around A$290 million.
It also cut its full-year net insurance margin guidance to a range of 9-11 percent from 10.5-12.5 percent as the UK business struggled and costs from some of Australia's worst natural disasters on record mounted.
In the first half, IAG was weighed down by a greater-than-expected A$121 million insurance loss from its UK operations while second half figures will be impacted by storms and floods in Australia, which could push full-year natural peril claim cost to A$500 million versus a budgeted allowance of A$435 million.
"We have made progress during the period in remediating our operation in the UK, but I'm disappointed to report that bodily injury claim inflation has continued to affect the local industry, and has exceeded our previously held expectations," Chief Executive Mike Wilkins said in a statement.
NO PLANS TO EXIT UK
IAG said its UK business should see further operating losses in UK in the second half but Wilkins, whose first task since taking over in 2008 was to restructure the insurer, said the group still believed the UK operations would be profitable in the longer term and there were no plans to exit.
IAG has spent about A$1.7 billion since 2006 in expanding in the UK but has taken charges to cover additional claims including A$365 million last year, which also ate into profits.
"We have exited more than 230 unprofitable broker relationships, and have stopped writing all private motor, externally sourced aggregator business. We will continue to exit other poorly performing business areas," Wilkins said.
The group's overseas problems are in contrast to a successful foray abroad by rival QBE Insurance Group , which has made over 75 acquisitions in the last 10 years to spread to nearly 50 countries.
IAG , which owns the NRMA, CGU brands, said first half insurance profit would be A$470 million, representing an insurance margin of 12.7 percent and compared with A$488 million a year ago.
The Australian and New Zealand operations that represent more than 90 percent of the group's gross written premium delivered a strong performance, with underlying gross written premium growing 6.3 percent and reinsurance cover protecting it from large claims
IAG will announce first half results on Feb 24. ($1 = 0.989 Australian Dollars) (Reporting by Narayanan Somasundaram; Editing by Balazs Koranyi)