Friends Provident, Britain’s fourth-largest insurer, and Resolution, the closed life consolidator, are in the early stages of merger talks to create an £8.3 billion insurer, The Times has learnt.

Shares in Friends Provident rose 4.25 per cent yesterday to close at 184.4p amid furious speculation that the insurer was a takeover target.

Philip Moore, who took over as chief executive of Friends Provident in January, and Jim Smart, the finance director who joined the insurer last November from Alliance Boots, are understood to have held a series of talks with Clive Cowdery, the chairman of Resolution.

Discussions are believed to have been going for several months and sources said that, although the deal could still fall through, the two companies hope to make an announcement within a fortnight.

Although Resolution has been busy digesting Abbey National’s life insurance business, which it bought for £3.6 billion last May, it is thought to be keen to make acquisitions of active insurance companies. The Abbey deal introduced Resolution, previously a specialist in closed life funds, to the open funds market. The consolidator, which has a market capitalisation of £4.3 billion, is believed to be keen to continue on the acquisition trail.

Last November Friends Provident set out a plan to triple new business profits in the UK from £64 million in 2005 to between £180 million and £200 million by 2008. The insurer is thought to be eager to find additional cashflows that could help it to fund this expansion.

Friends Provident has been the subject of takeover speculation since it floated in 2001. There have been rumours that JC Flowers, the US private equity firm, had approached Standard Life and AXA, the French insurer about the possibility of combined approaches for Friends Provident.

Friends Provident company information

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive