* Ally in May announced plans to sell international units
* U.S. auto lender is seeking to speed up bailout repayment
* Deal expected to add to ACE's earnings in the first year
* Deal expected to close in the first half of 2013
By Tanya Agrawal and Rick Rothacker
Oct 18 (Reuters) - Auto lender Ally Financial, which is 74 percent-owned by the U.S. government, will sell its Mexican insurance business to insurance and reinsurance company ACE Ltd for $865 million in cash as it looks to focus on its U.S. operations.
Ally, the former auto lending arm of General Motors Co , announced plans in May to sell its international operations in an effort to speed up repayment to taxpayers.
The company, once known as GMAC, has been trying to turn around its business by focusing on U.S. auto lending and banking and by shedding its Residential Capital mortgage unit, which filed for bankruptcy.
The Monterrey, Mexico-based insurance unit, ABA Seguros, was founded in 1956 and has more than 30 sales offices in Mexico. It is the fourth-largest Mexican auto insurer, ACE said in a statement.
Ally's international operations have drawn interest from more than 15 bidders, including banks and GM, a source familiar with the matter told Reuters last month. [ID: nL1E8KPLKI]
"We continue to be encouraged by the depth and breadth of the interest in the international businesses," Ally spokeswoman Gina Proia said. She declined to comment on the timing of other possible sales.
The ABA Seguros purchase price was more than double the unit's June 30 book value of $390 million.
The acquisition should close in the first half of 2013 and add to ACE's earnings in the first year, the company said.
Zurich-based ACE has been expanding in emerging markets through acquisitions. Last month, the company bought Mexican surety company Fianzas Monterrey from New York Life Insurance Company for about $285 million.
ACE, which lost the race for HSBC Holdings Plc's $1 billion general life insurance business in March, acquired Indonesian general insurer PT Asuransi Jaya Proteksi for about $130 million in June.
Shares of ACE were up 2.5 percent at $81.28 in morning trading on the New York Stock Exchange.
Ally received $17 billion in bailouts from the U.S. government during the financial crisis. Including dividend payments, it has paid back $5.8 billion.