The chances of QBE buying rival Australian general insurer, Insurance Australia Group continue to fade.

QBE's surprise 40% drop in forecast first half profit ended that dream as investors soured on the stock.

In fact the market's disenchantment with QBE continued yesterday with the shares down another 54c (3.2%) to a new five year low of $16.43.

That makes a fall of more than nearly 10% in two days.

Yesterday IAG confirmed that its 2010 results won't be flash at all, instead they will be pretty thin.

While the news confirmed earlier guidance, the market took the shares lower as they seemed to rule out any takeover activity, even though IAG is vulnerable.

IAG shares fell 15c, or 4.3%, to $3.35.

So anyone looking to buy IAG would have to be sure its problematic UK operations are now without future problems, while any local acquirer would have to come without blemish in the eyes of the market.

QBE's credibility has taken a shot this week, while IAG's has already been battered by three profit downgrades in the past year, the last of which set up yesterday's update which was released a month ahead of when the company normally reports annual earnings.

Annual net after tax profit to June 30 will be $91 million, down from $181 million in fiscal 2009, IAG said in yesterday's statement.

That's a near 50% fall to go with the 40% -plus fall in QBE's interim earnings.

IAG said it expects to announce an insurance profit of $493 million for the year, down from $515 million in 2009.

This would be achieved on net earned premium of $7.1 billion, down from $7.2 billion in 2009, it said.

In last month's guidance, IAG said its insurance margin - a key measure of profitability - would come in at between 6% and 7%.

Yesterday it forecast a margin of 7%.

And investors had already factored in the $367 million charge to profit linked to its troubled UK motor insurance business.

However, IAG cut final dividend by 1.5c a share to 4.5c to preserve capital.

But that isn't as tough as it sounds because the higher first-half payout means the full-year dividend of 13c a share is still 30% above 2009's depressed payout of 10c a share.

IAG chief executive, Mike Wilkins, said in the statement yesterday that the FY10 result showed a further uplift in the underlying performance of the group's Australian and New Zealand businesses during the year.

"While this year's financial result does not reflect the expectations we held at the outset of the year, I'm encouraged by the clear and ongoing improvement in the operational performance of our businesses in our home markets of Australia and New Zealand," he said in a statement.

"The results of these three businesses, which represent almost 90 per cent of our GWP, have improved year on year, providing evidence were continuing to benefit from our refined corporate strategy.

"The second half of the 2010 result has borne in excess of $200 million of net pre-tax claim costs in respect of the unprecedented Melbourne and Perth storms in March 2010, as well as the $367 million charge required in our UK business following the deterioration in bodily injury claim experience," the company said.

"I'm confident our performance will improve significantly in FY11.

"This is evidenced by our guidance which remains unchanged, and comprises an insurance margin of 10.5 per cent to 12.5 per cent."

IAG said the guidance for the 2011 financial year assumed losses from natural perils are in line with budgeted allowances of $435 million, no material movement in foreign exchange rates or investment markets, and lower net reserve releases (excluding the UK) than FY10.

"We're providing this information now, because we wanted to clarify the composition of our cash earnings and the impact on our dividend,'' Mr Wilkins said.

"After allowing for the final dividend, we remain in a strong capital position.''

IAG also said that the head of its UK business, Neil Utley, will leave the company, and will receive only ''non-performance based entitlements''.

He will be replaced by Ian Foy, currently CEO of IAG's New Zealand business.