* Q2 operating profit 1.25 bln euros, up 20 pct
* CEO says company can meet 13 pct ROE target ahead of time
* Solvency I ratio at 162 pct end June, above target
* Insurer looking to buy stake in Malaysian insurer-source
* Shares up 2.7 pct (adds source on Malaysian buy, shares, details on disposals)
MILAN, July 31 (Reuters) - Generali posted a 20 percent increase in operating profit in the second quarter helped by a shift towards higher-margin insurance products and a surprisingly strong performance in crisis-hit Italy.
The second quarter marked the end of an intense phase of disposals, a centerpiece of CEO Mario Greco's three-year turnaround strategy, that have helped Generali strengthen its financial base while it focuses on growth insurance markets.
Europe's third-largest insurer by market capitalisation said operating profit had risen to 1.253 billion euros ($1.68 billion) from 1.04 billion a year earlier.
On a conference call, Greco said he was "very optimistic" about reaching Generali's target of return on equity of 13 percent before an end-2015 deadline after delivering the company's best set of first-half results in seven years.
He said the company was looking to improve its current policy of distributing 40 percent of its profits in dividends to shareholders.
The company said its Solvency I ratio, a measure of an insurer's capital, stood at 162 percent at the end of June after a string of disposals, achieving its own target of 160 percent a year earlier than planned.
With the disposal phase behind it, Generali was now close to finalising the purchase of a stake in Malaysian insurer MPIB, a source with direct knowledge of the situation said.
According to the source, the deal, discussed by Generali's board this week, would involve the purchase of a minority stake initially, with an option to grow later.
Shares in Generali rallied 2.7 percent on the improved results despite an unfavourable low-interest environment and on expectations of higher dividends in the future.
Improvement in Italy, which is struggling to emerge from its longest economic recession in 70 years, was mainly due to a reduction of products on offer as well as savings deriving from the integration of Generali's various insurance brands.
However, net profit, affected by several one-off events, fell 13 percent to 416 million euros.
Writedowns included nearly 200 million euros on Generali's 38 percent stake in Russian insurer Ingosstrakh, mainly stemming from a devaluation in the rouble, Chief Financial Officer Alberto Minali said.
The insurer also took an impairment loss of 113 million euros on its Swiss private banking unit BSI, which it agreed to sell to Brazil's BTG Pactual for 1.24 billion euros this month.
The insurer's disposals have yielded 3.7 billion euros in cash, allowing Generali to reinforce its financial base and putting it in a position to absorb the agreed buyout of insurance holding GPH in eastern Europe for 1.235 million euros.
($1 = 0.7465 Euros) (Editing by Jason Neely)