By Edward West

Cape Town - Old Mutual's operating earnings at the halfway mark were disappointing, dropping 21 percent in rand terms to 73.4c a share from 92.9c, as the London-listed insurer suffered the effects of a slowdown in core life sales, poor results from banking and weak markets.

A Reuters poll of five analysts had forecast earnings of 83c a share.

In sterling, earnings dropped from 5.8p at the same time in 2002 to 5.6p a share.

The interim dividend was unchanged at 1.7p a share. The equivalent dividend in rands will be announced on October 3.

Jim Sutcliffe, the chief executive, said the results were at the lower end of most forecasts, but management had achieved most targets in difficult conditions.

Embedded value, a generally accepted yardstick in valuing insurance companies, rose 3 percent to £4.06 billion, or £1.06 a share, but fell in rands by 7 percent to R50.2 billion, or R13.10 a share, reflecting the impact of the stronger rand.

Sales in the core life operations fell to £261 million from £288 million. Group business premiums were held back by weak markets, which deterred clients from purchasing with-profit annuities, and by uncertainty as a result of recent legislation affecting pensions.

A range of new funds would be launched in South Africa in the third quarter. In the US the distribution channel and index tracking product range had been expanded. Cost controls were a key focus.

Lower interest rates and a slight improvement in equity markets should also boost consumer confidence.

Roddy Sparks, the managing director of Old Mutual South Africa, said recurring-premium income rose 9 percent in the six months - attributed to product strength, a flight to quality in the market and a bolstering of the distribution network.

Single-premium customers were more cautious because of the weak equity markets, but Old Mutual had responded with its Investing in Uncertain Times campaign, which had reaped some benefits.

In the US, the low and declining interest rate environment had rapidly curtailed the market for the type of life assurance products on offer. Both sales and margins at the US life business were lower. Nevertheless, the US asset management businesses maintained their net cash inflow position, said Sutcliffe.

He added that Sage's US operations would start contributing in the second half, a new distribution system had been added to the US operations and slightly higher interest rates should boost demand for the life products somewhat.

In the UK, sales of the Selestia products were doing well. However, results of the group asset management businesses were down because of lower average equity market levels and as a result of disposals.

The banking result was impacted by currency effects, higher costs of long-term funding, the short-term effects of the cash drain arising from the purchase of BoE and reduced earnings from investment banking. In the UK, its subsidiary Gerrard made a small profit.

Old Mutual shares lost 20c to close at R10.80 yesterday.