Old Mutual shares tumble after U.S. hit disappoints

By Clara Ferreira-Marques

LONDON (Reuters) - Insurer Old Mutual has posted a bigger than expected hit from troubles at its U.S. arm after markets deteriorated beyond its forecasts and warned that sales there could dip as a result in 2008, sending its shares lower.

News of the U.S. problems, which follow separate U.S. provisions taken last year, pushed Old Mutual shares down over 9 percent in early trade, despite a higher-than-expected 3 percent rise in its first-half operating profit. At 10:43 a.m., Old Mutual shares were changing hands at 99.4 pence in London, down 6.6 percent.

South Africa's largest insurer, which made around 20 percent of its life sales in the United States, has increased U.S. offshore sales in the past 18 months, but it warned in June that volatile markets could force it to strengthen reserves.

Problems escalated, however, and the group said on Wednesday it had made a 107 million pound ($209 million) provision to back minimum return guarantees -- three times initial indications.

Old Mutual said the hit would shave 63 million pounds off its half-year operating profit and warned it could be followed by additional provisions of 10 million to 15 million in the second half, if prices do not improve. The troubles will also hit full-year U.S. sales as the guaranteed products are withdrawn.

"There is no doubt that conditions this year have been significantly worse -- and that's led us to were we are," CEO Jim Sutcliffe said. "It is basically a modelling problem."

Sutcliffe said U.S. life sales could drop 15-20 percent this year as a result of the decision to withdrawn Bermudian products with ineffective hedging, and 35 percent next year, if the offshore products are not replaced.

"The issue has not been drawn to a close and the risks remains open, in that further downward moves in markets will lead to higher charges being taken," Merrill Lynch analysts said in a research note, downgrading the stock to "neutral".