UPDATE 2-Old Mutual to sell stake in Mutual & Federal

(Adds fund manager quotes, shares, background)

JOHANNESBURG, Aug 5 (Reuters) - Insurer Old Mutual Plc (OML.L)(OMLJ.J) said on Tuesday it would sell its entire stake in Mutual & Federal (MAFJ.J) through an auction in September.

The announcement came after Mutual & Federal (MAFJ.J) reported a 69 percent drop in first-half headline earnings per share to 58 cents per share, partly due to heavy fire claims.

M&F, which is 75 percent owned by Old Mutual plc, provides insurance services to the personal, commercial and corporate markets in South Africa, Namibia, Botswana and Zimbabwe. Its shares are listed on the Johannesburg Stock Exchange and the Namibian Stock Exchange.

"(Old Mutual) intends to initiate a competitive sale process in September 2008 to dispose of its entire shareholding in M&F," Old Mutual said in a statement.

In March 2007, Old Mutual called off talks to sell its stake in M&F to Royal Bafokeng Holdings, one of the richest tribal groupings in the country due to a steady stream of royalties from platinum mines.

"I actually think that somebody will pay a reasonable price for M&F, because if you do want to enter the South African insurance market, Santam (SNTJ.J) and M&F are the only firms with huge infrastructure and existing distribution relationships," a Johannesburg-based analyst said.

"There might be some trade buyer, another insurance company in the world, which would look at entering the South African market," said the analyst.

He added that M&F was quite a unique opportunity because Sanlam (SLMJ.J) would not sell its interest in Santam.

M&F shares fell as much as 3.22 percent and by 0817 GMT were unchanged at 1550, while Old Mutual rose 3.77 percent to 14.57 rand. The TOP-40 blue-chip index .JTOPI was down 0.07 percent.

"I think M&F is probably down a little bit in line with the general market sentiment here at the moment," said Ferdi Heyneke, a porfolio manager at Afrifocus Securities. "The fact that the market might think there is going to be an overhang of shares might be the reason they've come off."

M&F said its gross premium income rose 2 percent to 4.7 billion rand. Claims rose 6 percent to 2.83 billion rand, driven by a significant increase in the number of commercial and industrial fire claims and ongoing difficulties with the motor section of the group schemes portfolio.

Profit after tax for the period fell 66 percent to 172 million rand, the group said.

"The first-half of 2008 has been difficult due to a turn in the cycle and an unusually large number of fires," M&F managing director Keith Kennedy said.

A Johannesburg-based analyst said M&F results were poor, but added: "I have no doubt that the margins will correct themselves in 18 to 24 months out." (Reporting by Gugulakhe Lourie, editing by Will Waterman)