Aviva, which has a market value of nearly £15bn, is working on a share combination deal to buy Friends Life, which has a market value of £5bn.
The talks are at an advanced stage with Goldman Sachs acting for Friends Life and Morgan Stanley and Robey Warshaw for Aviva.
Aviva says adding 5 million Friends Life customers will create the biggest insurance and savings business in the UK with 16 million customers.
The insurer says the deal will lead to a substantial increase in profits and assets under management at Aviva Investors.
It says over time Friends Life’s UK assets under management, currently outsourced, will materially increasing Aviva Investors’ total assets under management.
On life insurance, Aviva says it will be in a better position to invest and innovate in pension freedoms next year.
It says the transaction would lead to a substantial increase in Aviva’s protection value of new business, more than double Aviva’s corporate pension assets under administration and create new opportunities by serving Friends Life’s £2bn of annual pension vestings.
A joint statement from the providers says: “The boards of Aviva and Friends Life note the recent press speculation and confirm that they have reached agreement on the key financial terms of a possible all share combination of Aviva and Friends Life.
“ The board of Friends Life has indicated to Aviva that it is willing to recommend the key financial terms of the possible offer to Friends Life shareholders, subject to reaching agreement on the other terms and conditions of any offer and the completion of mutual due diligence.
“Any transaction would be subject to regulatory approval. A combination of Aviva and Friends Life would create the UK’s leading insurance, savings and asset management business by number of customers, with a stronger balance sheet and significantly higher cash flows, enhanced by substantial synergies, from which to accelerate dividend growth.”