MILAN (Reuters) - Italy's biggest insurer Generali (>> Assicurazioni Generali SpA) on Thursday played down the prospects of a takeover as it reported its highest ever full-year operating profit and said it would raise dividends and speed up cost cuts.

The insurer emerged as a potential bid target in January when Italy's biggest retail bank Intesa Sanpaolo (>> Intesa Sanpaolo SpA) revealed it was looking at a potential combination.

The plan was later scrapped but the move ramped up pressure on Generali CEO Philippe Donnet to boost value for shareholders, make the group more solid and consolidate a management team that had recently lost its CFO and Chief Investment Officer.

Donnet, appointed CEO a year ago when Mario Greco stepped down to join rival Zurich Insurance Group (>> Zurich Insurance Group Ltd), said there was no threat of any takeover either from abroad or from Italy.

"That's a fantasy," Donnet told reporters during a conference call on the company's 2016 results.

Donnet is cutting costs and focussing on cash generation and the retail business to improve returns at Generali which, like other European insurers, is struggling to boost profitability as investment returns fall and competition increases.

Generali, Europe's third biggest insurer, has been a focus of takeover speculation over the past few months partly because of management upheavals. But rivals Axa (>> AXA) and Zurich Insurance have denied any interest, while Germany's Allianz (>> Allianz SE) has played down talk of it making a major acquisition.

The Italian insurer, whose biggest shareholder is investment bank Mediobanca (>> Mediobanca Group), is seen by Rome as a strategic asset because it is major buyer of government debt.

The company reported its highest ever operating profit of 4.83 billion euros for 2016 and declared a dividend of 0.8 euros per share on its 2016 results, up from 0.72 euros a share the previous year.

Operating profits last year rose 0.9 percent to 4.83 billion euros (4.2 billion pounds), above an analyst consensus of 4.7 billion euros, boosted by a better performance in both life and non-life business.

Generali, which has more than 500 billion euros in invested assets, is looking to shrink by selling businesses in 13 countries in an effort to raise 1 billion euros.

"There is a lot of appetite for these assets," Donnet said.

At 0822 GMT Generali shares were up 2.6 percent while the European Insurance index <.SXIP> was up 0.8 percent.

"We consider Generali’s results as a solid set of numbers. We also welcome the speed up in cost reduction," Banca IMI analyst Elena Perini, with a "buy" recommendation on Generali, said.

($1 = 0.9332 euros)

(Reporting by Stephen Jewkes and Gianluca Semeraro, editing by Silvia Aloisi and Jane Merriman)

By Stephen Jewkes and Gianluca Semeraro