Norwich Union owner Aviva yesterday confirmed that it was unwilling to table a hostile bid for Prudential - despite having a £17 billion proposal knocked back by its rival's board.
Shares in the Pru rocketed by more than 12 per cent to stand above the 708p level that Aviva was willing to pay in an all-share deal as investors pinned their hopes on a higher bid by its UK rival or the entry of European competitors such as Axa into the fray. A combination of the Pru and Aviva would create the world's fifth largest insurer, with a market value of £36 billion and income from premiums of about £40 billion.
Aviva - Britain's biggest insurer - approached its rival on Thursday but saw its overtures rejected by directors of the Pru who refused to enter talks.
Outlining its terms yesterday, Aviva chief executive Richard Harvey said there was "a compelling strategic, financial and operational logic" for a tie-up but his company was only prepared to proceed with its proposal on a recommended basis.
"This is a real opportunity to create a leading player in the global savings, investments and insurance market," Mr Harvey said.
"The group would have a significant presence and growth opportunities in Europe, Asia and the United States. This is a value-creating proposition for the shareholders of both companies."
However, Mr Harvey said Aviva would not be sweetening its existing proposal, adding: "We're certainly not in the process of entering into revised offers.
"We're very clear this is the proposal that was on the table; it's been rejected by Pru's board and it's really for their shareholders and ours to indicate if they would prefer for the arrangement to go ahead."
Around 42 per cent of operating profits of the combined group would be made in the UK, with 28 per cent from Europe, 17 per cent from North America and ten per cent in Asia.
Savings of £320 million had been identified with about half of this sum coming from a shake-up of its life and pensions business in the UK where the enlarged group would be the largest life assurer, making £456 million profits on £2 billion sales of new business.
Aviva added that the addition of the Pru's distribution and customer base in the UK general insurance market would help accelerate the growth of Norwich Union and the RAC motoring organisation.
Despite the rise in Pru shares - equivalent to £1.87 billion - analysts said Aviva faced a battle to convince the City of the merits of a deal.
In particular, they questioned why shareholders would want to create a business that would be less focused on Asia and the United States than the Pru is currently.
Robin Savage, an analyst at Panmure Gordon, said: "We expect Prudential's management will be able to convince investors that its independent future is more attractive than the possible cost savings on offer."
But he added: "Other FTSE 100 life companies would be less able to convince investors of the need to maintain independence."
The emergence of Prudential as a takeover target sent shares in a host of rivals higher, including Legal & General, Friends Provident and Royal & Sun Alliance.
Richard Hunter, head of UK equities at Hargreaves Lansdown, said: "Clearly the market believes the initial approach at 708p is too light, although early indications from Aviva imply that they believe this is a reasonably full price. Nonetheless, in the absence of a higher offer, there will not be much progress."