June 25 (Bloomberg) -- Old Mutual Plc, the U.K. insurer that is seeking to grow outside its main market in South Africa, dropped in London trading after saying first-half profit in the U.S. will decline on ``tougher'' markets and higher costs.

Old Mutual fell 1.9 percent, to 96.4 pence, the biggest decline on the FTSE All-Share Life Insurance Index. Reserves for higher first-half guarantee costs will be as much as $70 million, the London-based company said today in a statement. Operating profit will drop 25 percent at its U.S. life unit, and 10 percent in U.S. asset management, the company said.

``The reality is that conditions are harder,'' said Chief Executive Officer James Sutcliffe. ``We'll make the proper provision for it.''

Old Mutual, which is trying to lessen its dependence on South Africa, where currency and economic weakness are hurting earnings, makes about 16 percent of its profit from the U.S. Operating profit for the U.S. life-insurance unit for the six months to June 30 may fall to between $130 million and $140 million, even as margins and sales remain similar to 2007, the company said. The unit made a net income of $195 million in 2007.

The global credit-market contraction that began almost a year ago has forced financial firms worldwide to post losses and writedowns of $399 billion and raise $313 billion in new capital, according to data compiled by Bloomberg.

`Credit Impairments'

``Due to the difficult economic operating environment, additional credit impairments are required and the cost associated with guarantees has risen,'' the company said.

Margins at the asset-management unit, which made a full- year profit of $324 million in 2007, will be similar to last year in the first six months, the company said. Analysts at Keefe Bruyette & Woods Ltd. in London estimate margins may rise.

``Old Mutual offers value and should see some quarter-on- quarter improvements in sales margins over the rest of the year,'' Greig Paterson, a London-based analyst at Keefe Bruyette, wrote in a note to clients today. Paterson, who has a ``market perform'' rating on the stock, lowered his price estimate on the shares to 140 pence from 150 pence to reflect the decline in earnings.

Tom Turpin and Bruce Parker were named CEOs of the U.S. asset-management and life units, respectively.

-- With reporting by Ben Livesey in London. Editor: Ben Vickers, James Amott.

To contact the reporter on this story: Ben Livesey in London livesey@bloomberg.net; Poppy Trowbridge in London at ptrowbridge@bloomberg.net.

Last Updated: June 25, 2008 12:00 EDT