UPDATE 2-Sun Life buys Lincoln Financial's UK business

* Buys UK business operations C$359 mln

* Deal seen as start of Canadian buying trend

* Estimates ROE growing by 0.2 pct (Recasts with analyst comments, details, share price; in U.S. dollars unless noted)

TORONTO, June 15 (Reuters) - Sun Life Financial Inc SLF.TO said on Monday it bought the UK operations of Lincoln Financial Group LNC.N in a deal analysts said could be the start of an acquisition trend by Canadian insurers.

Canada’s No. 3 insurer said it would acquire Lincoln’s UK business for C$359 million ($317 million) as the troubled U.S. insurer announced it would take federal bailout money and sell stock and debt to shore up its balance sheet.

The deal is an early example of what is expected to be a consolidation trend by Canada’s relatively healthy and well-capitalized life insurers, who are looking to build market share at the expense of U.S. insurers hit hard by the global financial crisis and huge investment losses.

“We’ve been talking for a while about how the Canadian insurers were going to have an opportunity to pick up some distressed assets in distressed markets where some companies were looking to raise some capital. I think this is a clear example of that,” said Edward Jones analyst Craig Fehr.

Sun Life shares were down 1.8 percent at C$30.85 on the Toronto Stock Exchange on Monday morning, while Lincoln was down $1.42 to $16.33 in New York.

Lincoln has been working for months to stem its cash drain, slashing its dividend by 95 percent in February and more recently reaching a reinsurance deal with Goldman Sachs that improves its capital position by about $240 million.

Lincoln is one of six U.S. insurers named by Washington in May as eligible for bailout funds under the Troubled Asset Relief Program. Lincoln said it would take $950 million by selling preferred stock to the U.S. Treasury.

Toronto-based Sun Life said the purchase, which should be completed by the third quarter, is expected to increase its assets under management in Britain by nearly 60 percent to C$19 billion and double the number of policies to 1.1 million.

“Sun Life is seizing a compelling opportunity to expand the scale of its UK business by acquiring a highly complementary and sizable block of business,” Chief Executive Donald Stewart said in a statement.

“The combined operation is expected to generate attractive returns and serve to position Sun Life for future growth in one of the world’s largest life insurance markets,” Stewart said.

Sun Life said the deal is expected to add between 8 and 10 Canadian cents to earnings per share in 2010, an estimate Fehr said is more than doable.

“If some of the cost savings are realized, I think it could go up to about 12 cents in 2010,” Fehr said.

Return on equity is estimated to increase by 0.2 percent, Sun Life said.

Canada's three big insurers -- Manulife Financial Corp MFC.TO, Great West Lifeco GWO.TO, and Sun Life -- have all indicated their readiness to expand if the right deals present themselves, and Fehr said Sun Life's deal with Lincoln, while relatively small, signals the Canadians may be ready to take on some of the risk of U.S. acquisitions.

“What I think has been holding them back -- and this goes probably for the entire industry in Canada -- is this idea you don’t want to make an acquisition and have a landmine blow up in terms of the risk,” Fehr said.

“I think we’re starting to see now that maybe management is becoming a little more comfortable with the risk profile that is out there in these assets and if they can put cash to work in a profitable manner, in a rapidly profitable manner, I think that’s a good thing for shareholders.”

In May, Sun Life reported a first-quarter loss of C$213 million, due in part to reserve rebuilding as equity markets declined. But the company had a strong financial position, with a capital surplus ratio at 223 percent, well above the regulatory target of 150 percent, at the end of the first quarter.

$1=$1.13 Canadian Additional reporting by Juan Lagorio in New York; editing by Rob Wilson