The Direct Line-Churchill merger creates the UK's third largest general insurer. Jason Woolfe reports

The trumpeting telephone and nodding dog are getting together.

Direct Line and Churchill are to merge, creating the UK's third largest general insurer in a £1.1bn deal.

Royal Bank of Scotland (RBOS), which owns Direct Line, will hang on to both the red phone and the bulldog icons that have become two of Britain's best known brands.

The deal gives it the power to muscle its way up the general insurance league table, leapfrogging over rivals Zurich and AXA to take the number three slot behind Aviva and Royal & SunAlliance.

Although the deal is still subject to regulatory approval, it will give RBOS an estimated 16% of the motor insurance market and 13% of the home sector.

The two groups' complementary strengths in those sectors make the combination a powerful proposition.

Churchill is dominant in home cover, with five million policyholders, while Direct Line dominates in the motor sector, with six million policyholders.

Both companies have performed strongly compared over the past two years.

Churchill's profits increased by 53% in 2002, to £86.3m. Direct Line increased its contribution to its parent group by 36% to £355m.

Both companies made an underwriting profit last year, with Churchill's combined ratio at 99.3% and Direct Line's at 89.4%.

The £1.1bn price was met with general approval by analysts, who expect to see substantial costs stripped out of the new direct insurance giant.

Commerzbank analyst Chris Hitchings said the deal was about cost savings and would not create a general insurance monster to have Aviva and Royal & SunAlliance quaking in their boots just yet.

He said: "These are two players in the market who are combining to cut costs.

"If anything, Direct Line has been a modicum of caution and sensibleness in terms of competition. It's been Churchill that's been the fast grower, so anything that brings Churchill under the control of Direct Line has got to be good news."

RBOS chief executive Fred Goodwin is looking for annual savings of at least £86m - equal to Churchill's entire pre-tax profit last year - to get the combined group on its way to doubling profits over three years.

Goodwin said job cuts would be in the hundreds, rather than thousands and would not affect customer-facing posts.

The prospect of job cuts was met with anger by financial services union Amicus, which accused Churchill boss Martin Long of not keeping staff in the picture.

He had emailed all workers on May 22 promising them: "As soon as I have anything definite to tell you - I will."

An Amicus spokesman said: "He has been deceiving his staff, our members. The consultation he did, letting people know after the announcement to the stock market, isn't what we would consider the proper way to treat them.

"He's treating his staff like nodding dogs and not human beings."

Long is believed to be in line for a windfall estimated at £60m.

He has not commented publicly on his reward for the sale, but he is thought to have agreed a deal with Churchill's direct parent group, Winterthur.

Long set up Churchill in 1989, with £25m of backing from Winterthur, after setting up

Direct Line with fellow insurance entrepreneur Peter Wood five years earlier.

As Direct Line had built itself from a focus on car insurance, Long's operation followed a similar pattern focusing on home insurance, while Wood went on to found esure, the online insurer backed by Halifax and Bank of Scotland.

Now set to become deputy chairman of RBOS's newly enlarged insurance division, Long has a reputation as a champion of customer service and for managers getting back to the shop floor.

He has been quoted as saying he once tipped a shopping trolley full of groceries into a freezer at a supermarket in frustration when the till operator chatted with a friend instead of serving him.

Whatever reward he receives, Churchill's sale will come as a relief to Winterthur, which has been under pressure to repair its balance sheet following heavy losses on equity investments.