By Serena Chaudhry JOHANNESBURG (Reuters) - South Africa's second biggest insurer, Sanlam, predicted volatile market conditions would have a "major impact" on its full-year earnings and posted a drop in four-month profit. Sanlam, one of the biggest asset managers in South Africa, said on Wednesday normalised headline earnings per share for the four months to end April fell 23 percent, while core new business volumes rose 2 percent. "We expect the challenging financial and economic environment to continue for the remainder of the year and into 2010 -- an environment that is likely to impact on growth in the group's key operational performance indicators," Chief Executive Johan van Zyl said in a statement. Sanlam's shares fell 1.1 percent to 19.00 rand by 1414 GMT, slightly better than a weaker JSE financial index. "On the earnings side, it looks a little bit disappointing ... What I like is that their net client cash flows on the life side remains positive," a Johannesburg-based insurer analyst said. "That tells us that the good flow they experienced in 2008 wasn't just a blip ... life companies need to retain their clients in order to make profits off them because it's so expensive to get new clients." CONSUMERS TIGHTEN BELTS The firm said net fund inflows for the period were at 2.7 billion rand, and life net fund flows remained positive. Sanlam said consumers in the retail middle-income market had tightened up most on spending, with its personal finance, private investments and UK business hit hardest. It forecast in March that 2009 would be challenging, and expected its investment and capital markets operations to be worst hit due to exposure to volatile markets. Insurance companies worldwide have seen sliding markets shrink the value of their investment portfolios. South African insurers have also had their profits dented as relatively high interest rates, inflation and rising personal debt levels cut consumer demand in Africa's biggest economy. Short-term insurer Santam Ltd, majority-owned by Sanlam, said last Wednesday it expected the economic slowdown to further impact on premium growth and said headline earnings would remain "vulnerable" to volatility in its underwriting and investment operations. Headline EPS is the main profit gauge in South Africa and strips out certain one-off, financial and non-trading items. | 
