* German Leben unit valued at up to 1 bln euros
* Generali has option to own up to 10 pct of Viridium
* Germany remains strategic market, aims to grow further (Recasts, adds detail, comments from executives and analysts)
MILAN, July 5 (Reuters) - Generali has agreed to sell a majority of its German life insurance unit Generali Leben to private equity-backed Viridium for up to 1.9 billion euros, raising cash for the Italian insurer that could be used for targeted acquisitions.
Europe's third largest insurer said on Thursday it would sell 89.9 percent of Leben in a deal that valued the company at up to 1 billion euros ($1.2 billion). Viridium will also reimburse an internal loan of 882 million euros.
The deal is in line with Generali's aim of rebalancing its portfolio, significantly cutting exposure to interest rate risk and improving risk capital returns, the company said.
Generali Leben was put up for sale last year and Viridium had been vying with Fosun-backed peer Frankfurter Leben and Apollo-backed Athora for the asset, sources said. Reuters reported the exclusive talks with Viridium last week.
Generali Leben represents 36 percent of Generali's life insurance portfolio in Germany where it is the country's second-biggest player.
"Germany is a strategic market for Generali and we are now positioned better than ever to reinforce our footprint ... Our strategy in this market is to grow," Generali Deutschland CEO Giovanni Liverani said.
Generali wants to sell businesses in a dozen or so countries around the world to raise proceeds to help fund expansion of asset management operations and beef up its fee-based business.
It has already raised more than 1 billion euros from the disposals made to date. The Leben deal fuelled speculation about how it would use the cash when it announces a new strategy in November.
Barclays said in a research note on Thursday that the Generali Leben sale made sense from a strategic point of view but questioned the cost.
"Valuation is clearly at a deep discount ... the transaction will only have a modest impact on the group solvency ratio ... while removing 37.1 billion euros of traditional reserves," it said.
The deal with Viridium is still subject to the approval of German financial markets watchdog BaFin, which is analysing the credit worthiness and risk management of the buyer.
Viridium is 80 percent owned by buyout group Cinven with reinsurer Hannover Re holding the rest. It has 15 billion euros in assets under management after the acquisitions of three smaller so-called "back book" portfolios.
A source close to the matter said Generali would take 10 percent of Cinven's stake in Viridium, allowing Cinven to take some money off the table, while keeping a 70 pct stake.
Under the deal, Generali Investment Europe will manage the Generali Leben assets for a five-year period, for a total fee of 275 million euros.
At 1253 GMT, Generali shares traded 2 percent higher while Europe's insurance index was up 0.5 percent.
$1 = 0.8541 euros Reporting by Giulia Segreti in Milan Additional reporting by Tom Sims, Alex Huebner and Arno Schuetze Writing by Stephen Jewkes Editing by Toby Chopra and Edmund Blair