The boards of Aviva and Friends Life have reached agreement on the key financial terms of a possible merger.

Under the terms of the possible offer, Aviva would acquire the entire ordinary share capital of Friends Life on the basis of an exchange ratio of 0.74 Aviva ordinary shares for each Friends Life ordinary share.

Aviva said 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.

According to Aviva, the combined business would have leadership positions across key product areas and be better positioned to take advantage of the evolving UK life insurance market with greater capacity to invest and innovate.

Specifically, Aviva said 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 £2 billion ($3.1 billion) of annual pension vestings.

Aviva said the possible offer will be structured so that Friends Life shareholders would receive, whether by way of dividend or pursuant to the possible offer, an amount in cash equal to any Friends Life final dividend payment for the 2014 financial year.

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However, the shareholders would not be entitled to any additional amount in respect of any final Aviva dividend payment for the 2014 financial year.

Aviva has stressed that there can be no certainty it will proceed to make an offer for Friends Life. It said a further announcement will be made in due course.