LONDON (Bloomberg) - Old Mutual Plc, the UK insurer that makes most of its money in South Africa, posted 2007 operating profit that fell short of analysts' estimates as currency and economic weakness hurt sales.

Pre-tax profit under European Embedded Value rules, which makes assumptions for investment returns and is closely followed by analysts, missed their median estimate of £1.68 billion ($3.35 billion). Net income for the year was £972 million, or 18.1 pence a share, up from £836 million, or 16.1 pence, in 2006, the company said yesterday in a statement.

CEO Jim Sutcliffe bought Stockholm-based Skandia AB for 56 billion Swedish kronor ($8.4 billion) in 2006 to tap Britain's pension business and lessen Old Mutual's dependence on South Africa, where the rand is struggling and disposable incomes may fall, the company said yesterday. The rand is down 9.4 percent this year against Britain's pound sterling, more than any other major currency.

"Although the stock looks reasonably cheap, the company needed to deliver a clean set of results, but instead has reported a confusing picture which ultimately suggests problems in its largest division," said JPMorgan Cazenove Ltd. analyst James Pearce in a note to clients yesterday. He rates the stock "in line."

Old Mutual fell 3.9 percent to 131.7 pence in London, valuing the company at £7 billion.

The shares are down 21 percent this year, lagging behind the FTSE All-Share Insurance Index, down 12 percent.

The decline in Old Mutual's shares is "mainly driven by the weaker South African outlook, with about 70 percent of earnings being generated there," said Raghu Hariharan, a London-based analyst at Fox-Pitt, Kelton Ltd.

The company's US life-insurance unit has risk associated with collapse of the sub-prime mortgage market and resulting credit crunch. Mr. Sutcliffe said about three percent of the $21 billion that the US life unit invested in fixed-income is tied to sub-prime mortgages. Old Mutual said its Nedbank unit has no direct risks in US sub-prime mortgages.

The unit also has risks tied to bond insurers, with 2.3 percent of the US portfolio backed by so-called monolines.

Bond insurers may face rating downgrades that could limit their guarantees and force investors to contribute more capital.

"The vast majority of it is rated AAA," finance director Jonathan Nicholls told reporters on a conference call. "We are not anticipating any losses crystallising from that holding."

Old Mutual said funds under management rose 18 percent to £278.9 billion. The company said it's sticking to the target of managing £300 billion in 2008. The company raised its final dividend by 10 percent to 4.55 pence a share.

The insurer's new business in the US rose 47 percent in dollar terms, driven by growth in Bermuda, it said.