The deal, worth 275p per share, represents a 73% premium to Direct Line’s pre-offer share price and will create a major force in the UK insurance market.

Direct Line, which employs over 9,000 people, has faced challenges including job cuts and customer losses. Despite initial confidence in its own strategy, the company acknowledged the attractiveness of Aviva’s offer. The deal will provide Direct Line shareholders with approximately 12.5% ownership in the enlarged Aviva group.

Dan Coatsworth, investment analyst at AJ Bell, said: “Aviva had no choice but to dig deeper if it wanted to secure Direct Line. Low and behold, the offer has been raised to a much more realistic level to get the deal done.

“Offering 275p per share amounts to a generous 73.3% bid premium, implying that it is paying a fair price based on current and future prospects. A cash bid at this price would have been the sweetest of deals, but as it stands an all-share deal is the next best thing.

“The next test is to see if shareholders push for more. Judging by recent City chatter, 275p should be enough to keep everyone happy and Aviva might be able to wrap this up fairly quickly.

“Aviva has performed every step of the takeover dance flawlessly. It’s spotted a rival going through a weak phase and thrown its hat into the ring as an interested buyer with a low-ball price to test the water. It will have almost certainly known the first bid would have been rejected and it’s now come back with a higher and fairer offer, and Direct Line’s board has indicated it’s good enough.

“Had it simply gone straight in at 275p, there was a chance that Direct Line and its shareholders would have pushed for more, given that second time’s the charm when it comes to M&A.”