Aviva shares fell almost 4pc and Friends Life jumped 7pc on Monday following news of their possible £5.6bn merger, seen as providing a good fit in the life and pensions insurance sector.
The two companies said they had agreed terms of a possible all-share deal, with Aviva offering a 15 percent premium to Friends Life's share price to give those investors a 26 percent stake in the new company.
Investors said the deal made sense at a time when insurers are facing changes in the British pension system, though the timing was a surprise, with both companies in turnaround mode.
"Although the details on the deal are pretty light so far, this is a sensible move for Aviva, it is consistent with management's focus on cash flow generation," said Alessandro Valentini, fund manager at Causeway Capital, which owns Aviva shares.
"The initial assessment suggests the valuation for the deal is fair."
The companies rushed their statement through late on Friday following media speculation of the merger, and contained no figures on cost savings.
The deal should produce cost and revenue synergies of 1.7 billion pounds, more than offsetting the offer premium of 700 million pounds, Bernstein analysts said in a client note. They said it was "a good deal for shareholders of both Friends Life and Aviva but, on the face of it, a better deal for Friends".
But Eamonn Flanagan at Shore Capital reiterated his "sell" recommendation on Aviva, saying the merger was "nothing more than a rights issue in disguise".