IAG, which rebuffed a takeover approach from bigger rival QBE Insurance Group earlier this year, made the comments in a trading update and business review, the first review under new chief executive Michael Wilkins.
The group spent about A$1.7 billion since 2006 to expand in the UK as it battled tough market conditions in Australia. But the move failed to deliver expected returns, forcing the company to review its overseas expansion.
"It's clear from our recent financial performance we need to do better," Wilkins said in a statement. "Our aim is to create shareholder value by making IAG a more tightly-managed portfolio of high performing, customer-focused and diverse general insurance businesses," Wilkins said.
"The changes announced today will involve a short-term financial impact, however we believe these actions are necessary to give us the platform to improve the performance of the business over the medium to longer term," he added.
A new efficiency program was expected to deliver A$130 million in annual cost savings, the group said.
IAG shares are down about 11 percent in 2008, just half the decline in the benchmark S&P/ASX 200 index in the same period.
IAG said it would continue to pursue select Asian growth opportunities, focusing on Thailand, Malaysia, India and China.
IAG also announced several senior management changes, including the appointment of a new chief financial officer and new CEOs for its UK, New Zealand and Asian operations.
IAG's planned exit from the UK is in sharp contrast to QBE's successful overseas expansion having completed about 110 purchases in past 25 years.
IAG also decided to cut its dividend payout ratio to about 50-70 percent of earnings from the current fiscal year. The ratio had been as high as 100 percent in fiscal 2008.