* Total 2012 dividend down 7.3 pence vs 9.3 pence consensus
* Shares down 13.3 percent, biggest FTSE faller
* 2012 operating profit 684 mln stg vs 665 mln stg consensus
LONDON, Feb 20 (Reuters) - RSA, Britain's biggest business insurer, unexpectedly cut its dividend by a fifth after weak investment returns, sending its shares sharply lower.
Shareholders in RSA, best known in Britain for its More Than home and motor insurance brand, will receive a total payout for 2012 of 7.3 pence per share, down from 9.16 pence the previous year, the company said on Wednesday.
The cut wrong-footed analysts, who had expected the dividend to rise to 9.3 pence, according to a company poll. By 1002 GMT, RSA shares were down 13.3 percent, the steepest faller in Britain's FTSE 100 index <.FTSE 100>.
RSA, the dividend yield of which has been among the highest in the European insurance sector for several years, said the cut would offset falling revenues as persistently low interest rates eat into its returns from bond investments.
Chief Executive Simon Lee said this would help it to make small-scale acquisitions in fast-growing emerging markets, emphasising that there is no need to bolster RSA's regulatory capital reserves.
"We felt that if we were continuing to pay out at such a level it would eventually become a constraint on the business, and we wanted to retain more earnings," Lee told reporters on a conference call.
"This is a coverage issue, not a capital issue - the balance sheet remains strong."
RSA, which aims to expand in Asia and Latin America to offset sluggish growth in its core British and European markets, also reported full-year operating profit of 684 million pounds ($1.06 billion), down 6 percent on the year, but ahead of the 665 million pounds pencilled in by analysts.
"We view the cut as very disappointing, given that nothing has materially changed over the last 12 months," Panmure Gordon analyst Barrie Cornes wrote in a research note, changing his recommendation on the stock to "sell" from "hold".
Income from investments is a key source of revenue for insurers, and rock-bottom rates have put the industry under pressure to conserve capital and boost profits from underwriting.
RSA's dividend cut comes three weeks after Spain's Mapfre reduced its 2012 payout to 0.11 euros ($0.15) per share from 0.15 euros the previous year.
There is speculation that Britain's Aviva could also trim its dividend this year as it pushes through a reorganisation aimed at bolstering capital and profit.
Lee said that low interest rates this year are expected to wipe 200 million pounds off RSA's investment income compared with 2008, when central banks cut borrowing costs almost to zero in an effort to revive the economy after the financial crisis.
The insurer's total investment income fell to 515 million pounds in 2012, from 579 million pounds the previous year, and is expected to drop again to 479 million pounds in 2013.
The reduction in RSA's 2012 dividend reflects a one-third cut in the final payout for the year. There will be a similar cut in its 2013 half-year dividend, saving the insurer about 100 million pounds, Lee said.