By Lorraine Turner LONDON (Reuters) - Anglo-South African insurer Old Mutual posted a bigger than expected drop in statutory profit on Wednesday but an improvement at its troubled U.S. life business offset weakness in Europe. South Africa's largest insurer said its earnings were boosted by investment returns from its US bond portfolio, after it reported a major reduction in unrealised losses, a key figure analysts were watching. Shares in Old Mutual rose 1.16 percent at 0856 GMT, after dipping as low as 4 percent in early trade, and nearly tripling in value since record lows in March. "Numbers look pretty strong, especially on an MCEV basis - where there has been a strong rebound," said Jon Hocking at Morgan Stanley. The group was also bolstered by an improvement at its troubled U.S. after it said it had largely completed a major overhaul of the unit. "The U.S. life business is in substantially better shape, it has improved dramatically," said one South Africa-based analyst who did not wish to be named. "The improvement in the U.S. business has more than offset the European business. The net is positive, but there are still issues," he added. Shares in Old Mutual lost about two thirds of their value in 2008, partly reflecting concerns over its U.S. division which was hit by rising costs. The insurer said it is expected to reduce sales by about two-thirds but that the division was likely to need another cash injection next year expected to be between $200 million and $300 million, with the unit still presenting significant risks, say analysts. The company, with a diverse range of businesses in South Africa, the U.S., Europe and Scandinavia, has undergone a period of change since the departure of its former chief executive, Jim Sutcliffe, who stepped down in September. It announced further management change on Wednesday, with the appointment of Patrick O'Sullivan as chairman, a former finance director at Zurich Financial Services, replacing Chris Collins who will retire at the end of the year. NO DIVIDEND Old Mutual's operating profits were hit by weakness in Europe and South Africa's Nedbank. Weak economic conditions and lower financial markets hit its European businesses, prompting lower sales volumes and putting new business margins under pressure. MCEV earnings fell 86 percent to 40 million pounds. Meanwhile earnings at its U.S. unit were $398 million higher than the comparative period at $388 million. Adjusted operating profit fell 30 percent to 538 million pounds in the six months to the end of June. Analysts had expected a figure of 555 million pounds according to a poll compiled by the company. Operating profit on a market consistent embedded value basis, which will become the required standard for all European insurers by the first quarter of 2010, was 755 million pounds, down from 902 million last year but above the 514 million expected by analysts. The insurer said that while there had been no defaults on its corporate bond portfolio in the period it had suffered impairment losses of $199 million on investments such as mortgage-backed and hybrid securities. Elsewhere the company confirmed that it would not pay an interim dividend having said in March that there would be no payout for shareholders this year. "The board will consider the position in respect of a final ordinary dividend for 2009 at the appropriate time in light of the then prevailing market and economic conditions," the company said in a statement. The group said it had a pro-forma financial group directive surplus of 1.1 billion pounds at the end of July, up from 700 million at the end of 2008. | 
