By Daniel Hunter

Fund managers have said that the potential purchase of Friends Life by Aviva reflects a need to consolidate the nation's insurance industry.

Aviva are lining up a potential £5.6 billion take-over of Friends Life, with agreed terms of a possible all-share deal said to have been finalised last Friday.

The deal would offer Friends Life shareholders a 26 percent stake in the new company.

The proposed transaction shows how insurers are having to rethink they way they do business after the British government changed rules covering annuities, which provide retirement income, causing a slide in annuity sales.

"Consolidation per se in UK life insurance is not a surprise and is necessary," said David Moss, head of European equities at F&C, which has Aviva shares, according to Thomson Reuters data.

"The surprise is perhaps that both businesses are not where they would want to be yet and are in the middle of restructuring programmes of their own."

Max Anderl, fund manager at UBS Global Asset Management, said he had bought into Aviva after it cut its dividend several years ago, as he saw potential for the share price to grow as new management restructured the company.

"The restructuring story has played out very well under the experienced leadership of Mark Wilson. The plan seems to be to do it all again via a merger. Given there is little growth out there this seems a sensible strategy to me," he said.

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