Aviva has agreed to buy the rival insurer Direct Line for £3.7bn, with up to 2,300 job cuts planned as the companies aim for £125m in cost savings.

Aviva, a FTSE 100 member and the UK’s largest insurer, said on Monday it would offer the equivalent of £2.75 for each Direct Line share in cash and shares.

Aviva also said it would sweeten the deal for its shareholders by increasing the planned dividends, reflecting the fact the company would be larger and generate higher profits.

Aviva and Direct Line had reached a preliminary agreement earlier this month and the former had until Christmas Day to make a formal offer or walk away under UK takeover rules.

The agreement is likely to cast a pall of uncertainty over Christmas for many employees of the combined group.

The companies said they planned to cut 5-7% of the combined group’s employee base, equivalent to between 1,600 and 2,300 jobs of 33,100. Aviva employed 23,000 people at its last annual report, while Direct Line Group employed 10,100.

Those cuts will not be made immediately but will take place over three years. The companies argue that the ultimate number of roles reduced could be lower because Aviva has 800 vacancies and turns over 1,300 staff annually.

Amanda Blanc, the Aviva chief executive, said the deal was excellent news for the customers and shareholders of Aviva and Direct Line.

“It builds on our track record of delivering four years of strong financial performance and, in line with our strategy, it accelerates our growth in capital light business,” she said. Customers would benefit from “competitive pricing, an enhanced claims experience and even better service” and “a more efficient business”, she added.

The companies, which are headquartered in London, said the £125m in annual savings would come from a “reduction in overlapping roles across the combined insurance operations”, cutting “duplicative” jobs running back office computer systems, and in corporate and head office roles.

The companies said Direct Line’s “core brands”, Direct Line, Churchill and Green Flag, would be maintained, raising questions over the future of smaller brands such as Privilege and Darwin.

They said they expected £250m in integration costs, mostly from making redundancies.

Aviva’s share price had dropped by almost 7% since it announced a first offer on 28 November, compared with about 2% for the broader FTSE 100 index.

Direct Line rejected the initial £3.3bn offer, but agreed to a deal then valued at £3.6bn a week later. Its share price has surged from £1.58 before the first approach to £2.43 on Friday, although still far short of the levels above £3 hit as recently as January 2022.

Adam Winslow, the Direct Line chief executive, said the company was home to many well-loved insurance brands. He added that the deal would give the opportunity to create a strengthened and enlarged business.

The Direct Line deal marks another blockbuster takeover for Aviva, which bought Friends Life for £5.6bn in 2014, cutting 1,500 jobs as it sought £225m in cost savings.