Aviva has won board agreement for a £1.1 billion takeover of RAC, in a move which will cost 1,700 jobs and herald the expansion of the breakdown recovery brand into financial services.

Aviva, Britain’s largest insurer, said that the merger of its Norwich Union insurance operations with RAC would create a "powerful new force in the UK insurance and motoring services industry".

"This is a transformational acquisition for Norwich Union Insurance,” Patrick Snowball, the division's chief executive, said.

However, RAC shares soared beyond the 925p offered by the Aviva bid to 940p in early deals on hopes of a rival bid. Aviva may face a challenge from Kohlberg Kravis Roberts, the US buyout firm, which lost out in last year's battle for the AA.

Cinven, which also failed in the AA auction and tried to buy RAC in 1999, is also seen as a likely suitor.

Aviva said that its takeover plans would "realise the potential" of the RAC’s tentative expansion into insurance and financial services.

Of the RAC’s 2.2 million individual members, only one-in-eight has purchased an additional policy. Yet changes in the insurance market meant that well-known organisations and large retailers, boasting low costs of customer acquisition, had emerged as "powerful distributors" of insurance products, Aviva said.

The company, which two years ago started a Norwich Union breakdown service, was also targeting a rise of 600,000 in the RAC’s roadside recovery customer base by the end of 2007. The RAC’s current roll includes 4.5 million members through corporate schemes.

"The acquisition of RAC builds on our success in the UK general insurance market and creates a powerful new combination in insurance and motoring services,” Richard Harvey, the Aviva chief executive, said.

However, Aviva warned that 1,700 posts would go from a total of 24,000 for the merged group as managers sought £80 million in annual cost savings targeted through the tie-up. About 900 post would be lost through merging administration operations with 800 going overseas.

Aviva has already switched thousands of call centre jobs from Britain to India.

The takeover was revealed as Aviva unveiled a 25 per cent rise to £2.34 billion in group operating profits driven by 47 per cent growth, to £1.32 billion, in earnings from general insurance.

"Aviva is thriving," Mr Harvey said.

Profits from life insurance operations rose by 9 per cent to £1.61 billion, helped by a return to growth of the UK-focused Norwich Union Life business, which achieved a 12 per cent rise to £7.87 billion in sales.

Aviva shares stood 13p higher at 675.5p in afternoon trade.

RAC stock stood up 58.5p at 939p. Yesterday, when the company revealed a suitor, the shares gained 138.5p.

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