Old Mutual, the Anglo-South African insurer, gave warning that a tough exchange rate and heavy investment costs would hold back earnings growth this year as it reported a 7 per cent improvement in annual pre-tax profits to more than £1.7 billion.

The insurer, which was transformed last year through the £3.3 billion acquisition of the Swedish financial group Skandia, said that costs would rise across Europe and at its life insurance business in South Africa.

Profits attributable to shareholders fell to £836 million, from £867 million, using one accounting standard, and the impact of the Skandia deal sent basic earnings per share down nearly a third to 17p.

But Jim Sutcliffe, the chief executive, said that Old Mutual was still on course to hit cost-saving targets for Skandia of £70 million a year by the end of next year. By then, he said, group funds under management would have jumped to more than £300 billion.

The shares rose almost 2.5 per cent, up 4.5p at 186p.

Funds under management soared 31 per cent to £239 billion over the 12 months to the end of December, Old Mutual said.

Mr Sutcliffe, who successfully secured Skandia through a hostile bid after several friendly attempts failed, said that the group had "an excellent set of growing businesses". He also boasted that the post-Skandia international transformation of Old Mutual was now "apparent", with about 60 per cent of annual life sales on an annual premium equivalent basis coming in the UK and the rest of Europe.

Group sales of life assurance rose 137 per cent to £1.5 billion on an annual premium equivalent basis, with life sales in the UK rising 16 per cent to £558 million and in Europe as a whole rising 13 per cent to £881 million.

Mr Sutcliffe added that more than three quarters of funds under management were now in the US and Europe.

Old Mutual said the new financial year had started well and said Skandia was performing better than expected. "We have been pleased with what we have found at Skandia and the cultural integration has progressed well," Mr Sutcliffe said. "The synergy targets announced at our market update in June 2006 are on track, with some associated costs to be incurred during 2007."

Group new business profits more than doubled to £244 million, helping to prompt a 13.7 per cent increase in the dividend to 4.15p a share.

Tim Young, insurance analyst at Collins Stewart, said: "The Skandia acquisition was a bold move with advantages for both parties but the price was such that it will take some years before it is obviously value-creative. Management notes that integration and restructuring costs will hold back 2007 too. We see no reason to own this name for distant prospects."

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