Royal & SunAlliance, the UK's second-largest commercial insurer, pledged to raise the first-half dividend this year by about 40 per cent after finally selling off its struggling American arm and posting stronger than expected operating profits for 2006.

Shares in RSA rose nearly 2 per cent, up 3p at 163p, as investors welcomed the increased dividend payout, which came alongside cost cuts running ahead of time and sector-leading operational efficiencies.

But, while analysts welcomed the news on the dividend, takeover rumours persisisted and helped to drive the price higher. Tim Young, an insurance analyst at Collins Stewart, said that RSA's "current business portfolio makes no strategic sense at all", describing the insurer as a pure play on personal and commercial insurance lines and speculating that a break-up of the group is "almost inevitable".

But Andy Haste, the chief executive, hailed a "strong performance" at RSA where underwriting profits rose 18 per cent to £310 million and net written premiums rose by 3 per cent to £5.5 billion.

Mr Haste said that the completion of the US sale earlier this week "resolves the group's last remaining legacy issue" and promised that in the years to come RSA would reward shareholders by growing the dividend "at least in line with inflation".

The dividend for 2006 was increased by 35 per cent to 4.12p.

Investors were hoping that the sale of the US arm, non-core to the insurer since 2003 and riddled with problematic liabilities including asbestos, should leave RSA able to free up cash and bump up the capital return. As expected, the insurer took a £499 million write-down on the sale and fell to a £20 million after-tax loss following the disposal.

But operating profits were up 5 per cent at £780 million, higher than the £764 million expected by most analysts.

"Our portfolio of businesses is strong, we are growing profitably in our target trades and we are well positioned to continue delivering sustainable profitable performance," Mr Haste said.

The loss compares with profits of £605 million last time, when RSA was boosted by a £180 million one-off gain following changes to the pension scheme.

It said today that it was ahead of target to deliver £130 million of cost cuts by the middle of next year.

In the UK, profits and efficiency increased, with net premiums for personal insurance up 2 per cent at £848 million but commercial premiums down 1.8 per cent at nearly £1.8 billion.

RSA made advances in all of its international businesses, including in Canada, Latin America, Asia and the Middle East.

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