UPDATE 3-BMO to buy AIG's Canada life insurer for C$375 mln

(New throughout)

By Susan Taylor

OTTAWA, Jan 13 (Reuters) - Bank of Montreal (BMO.TO) will buy the Canadian life insurance business of American International Group Inc (AIG.N) for about C$375 million ($305 million), the companies said on Tuesday, the latest in a series of asset sales at distressed prices.

AIG, which since September has received $152 billion in U.S. government bailout financing to avoid collapse, is scrambling to raise cash through the sale of some of its units.

Toronto-based AIG Life of Canada, with 300 employees and 400,000 customers, sells insurance and retirement savings products such as universal and term-life plans, critical illness plans and annuities.

BMO, Canada's fourth-largest bank by assets, said the all-cash transaction will only slightly reduce its Tier 1 capital ratio and is expected to add to earnings within a year. Capital ratio is a measure of financial strength that's closely watched by investors.

Shares of BMO rose 2.2 percent to C$33.54 on the Toronto Stock Exchange at mid-session on Tuesday. The stock has shed about 40 percent of its value in the last 12 months.

Desjardins Securities analyst Michael Goldberg said the deal will not transform BMO but sends a positive signal.

"The impact of the deal on BMO's near-term earnings potential looks relatively immaterial, but the optical impact, I think, is positive," he said.

"Here you've got a bank that is selling an 8.5 percent dividend yield, reflecting concern about its outlook, concern about its capital, and yet it can go ahead and buy something for C$375 million cash."

BMO will still lag sector leader Royal Bank of Canada (RY.TO), but the transaction will help position the bank in a sector poised for growth.

BOOMERS ARE BORROWED OUT

"There is a demographic shift that's taking place away from lending," Goldberg said.

"The boomer generation is borrowed out, but the boomer generation is also nearing the time when it considers its needs for protection whether it's critical illness insurance or things like longevity risk."

Dundee Securities analyst John Aiken said that BMO is making "an opportunistic acquisition at a good price" that will help diversify revenue, gain customers and add earnings. Aiken estimated in a research note that BMO's Tier 1 capital stands at over 10.2 percent.

Integration into BMO's insurance operations will take place over the next six to 12 months, the bank said, and the deal is expected to close by June 1. The new company will be called BMO Life Insurance Co.

AIG, once the world's largest insurer, had to be bailed out by the U.S. government after bad mortgage bets triggered a cash crunch that left it on the verge of bankruptcy.

The company has said it plans to sell everything except its U.S. property and casualty business, foreign general insurance, and an ownership interest in some foreign life operations.

So far, a handful of asset sales have each garnered prices under $1 billion, but analysts expect some of the sales currently on the table -- including what has been a highly profitable aircraft leasing arm -- to fetch multi-billion dollar price tags.

BMO and other Canadian banks recently said the time was not right to rush into large acquisitions in the United States or abroad, despite the relative bargains produced by the global economic downturn.

At an investor conference last week, BMO Financial Group Chief Executive Bill Downe said that taking on another bank's loan book and having to work it out was not an attractive proposition.

"We've been very cautious in the last 18 months with respect to making acquisitions in the U.S. and I still think it's early," he said. "I think you can be quite patient." ($1=$1.23 Canadian) (Additional reporting by Joseph A. Giannone and Lilla Zuill in New York; editing by Frank McGurty)