Aviva to buy out Friends Life

British insurer Aviva said it had agreed terms on a possible deal to buy rival Friends Life for GBP5.6 billion as British pension reforms put pressure on insurance companies to find new business.

Pension providers are rushing to reinvent themselves after the government in March unexpectedly removed obligations for people to buy an annuity, or income for life, at retirement, sharply cutting annuity sales.

The deal would strengthen Aviva's balance sheet and reduce its leverage, as well as boosting its assets under management, it said.

Friends Life has a stronger presence in the growing "bulk annuity" market, in which insurers take on the risk of part or all of a company's pension scheme.

"The transaction would…more than double Aviva’s corporate pension assets under administration and create new opportunities," the statement said.

Friends Life posted a seven-percent drop in operating profit in the first half, while Aviva saw a four-percent rise.

Under the terms of the offer, Friends Life shareholders would own around 26 percent of the combined group. They would also receive an amount in cash equal to any Friends Life final dividend for the 2014 financial year. Friends Life shares are down two percent this year, while Aviva has gained 20 percent.