South Africa's largest property and casualty insurer Santam Ltd expects underwriting margins to remain under pressure in the second half after a rise in high-value property fire claims hit first-half returns.

The group reported a rise in first-half profit on Wednesday thanks to better returns on its investment portfolio, but said underwriting returns had been stifled by increased claims from industrial and fire-related incidents.

Headline earnings per share -- the key profit gauge in South Africa -- climbed 219 percent to 284 cents, in line with its forecast of a 215 to 225 percent rise. Its net underwriting result fell to 88 million rand versus 326 million a year ago.

The numbers look worse than I had in my forecast, largely as a result of higher claims. Luckily for them, it's offset by a slightly lower expense ratio and higher investment gains, one Johannesburg-based insurance analyst said.

The company said demand for its commercial and personal lines business would remain soft as it did not expect South Africa's economy, battling its first recession in 17 years, to recover before 2010.

Most South African insurers' profits have taken a hit from the global slide in equity markets, as well as a reduction in consumer demand due to relatively high interest rates, inflation and rising personal debt.

Liberty Holdings, South Africa's No. 2 insurer, earlier this month swung to a first-half loss as rising policy lapses hit its life unit hard, while Mutual & Federal reported a drop in first-half profit, but said underwriting levels had improved in the second quarter.

For Mutual & Federal the numbers weren't quite as bad as Santam, so clearly something's gone a little bit awry, particularly from a group where claims have generally been significantly better than Mutual & Federal, the analyst said.

Santam, majority-owned by financial services firm Sanlam, said the improvement in its investment portfolio had been helped by a recovery in equity markets and said favourable interest rate returns had had a positive impact on its cash-related investments.

Sanlam, which reports its first-half results on Sept. 3, posted a drop in four-month profit in June and said volatile market conditions would have a major impact on its full-year earnings.

Santam said it would match 2008's interim dividend of 166 cents per share. Its shares were unmoved by its results, trading 0.5 percent higher at 89.50 rand by 1321 GMT. The JSE Mid-cap index .JMIDC was 0.2 percent lower.

(Editing by David Holmes)