Aviva has agreed a deal to buy rival insurer Direct Line in a £3.7bn deal. The FTSE 100 insurer is set to purchase its smaller competitor after a £3.3bn was bid turned down in November.

The companies had been locked in talks ahead of a Christmas Day deadline.

A deal between the two firms would create a significant force in the motor insurance sector, estimated to cover more than a fifth of the total UK market.

Aviva chief executive Amanda Blanc said the deal is "excellent news" for both companies' customers.

"Aviva and Direct Line share a deep commitment to excellence in looking after customers and this will remain a top priority following the acquisition," she said.

"The financial strength and scale of the combined group means customers will benefit from competitive pricing, an enhanced claims experience and even better service."

The takeover will see Aviva pay 129.7 pence in cash and 0.2867 of its own shares for each Direct Line share.

It will also pay up to 5p in dividend payments per share to Direct Line shareholders as part of the deal.