Friends Provident has been a takeover target for a while

The all-share deal will create a firm with a market value of �8.6bn.

The combined group will be called Friends Financial. Its life and pensions products will be sold under the Friends Provident brand.

Friends Provident chief Philip Moore said the two firms would "create a powerful new player in the life and pensions industry".

Access to cash

Friends Provident sells life protection, income protection, pensions and investment products throughout the UK to both individuals and businesses.

It has about 2.5 million customers and employs 5,000 staff.

Resolution would seem to be paying a very low price to access Friends Provident growth potential Charles Graham, Evolution Securities Friends Provident share price Resolution share price

Analysts say it has a strong brand but needs access to capital to build their business as financial advisers generally charge upfront commission to distribute financial products, such as those that Friends sell.

Resolution, on the other hand, has a cash-rich balance sheet, as it took advantage of the stock market crash at the beginning of 2000 to buy distressed blocks of closed life insurance funds at a discount to their real value.

Under the terms of the tie-up, Resolution shareholders will receive 3.25 new Friends Financial shares for each Resolution share.

They will own 50.9% of the combined business, while Friends Provident investors will own the remainder.

The merger is expected to generate at least �100m in annual savings by the end of 2010 and is also hoped to start generating additional earnings by 2009.

Good deal for Resolution?

Life funds takes premiums paid into life assurance policies and invests them in a range of assets, such as equities, bonds and cash, but many were forced to close after suffering from poor stock market returns about five years ago.

With large-scale changes in the way these policies are now invested and the return of rising stock markets, observers note this avenue of growth is now closed to Resolution, which now plans to access the expanding open life insurance market.

Observers believe the agreed tie-up represents a good deal for Resolution.

"Resolution would seem to be paying a very low price to access Friends Provident growth potential," said Charles Graham, an analyst at Evolution Securities.

However, he added: "While Resolution will be providing the cash flow to help fund new business growth, the group's lower Standard & Poor's rating is a potential handicap and the challenges of merging the very different cultures of the two businesses are likely to be considerable."