Analysts have broadly welcomed the merger of CGU and Norwich Union but are playing down the likelihood of a counter-bid from a rival European insurer.

However, Pehr Gyllenhammar, the chairman of CGU, said more mergers are likely.

"You should see this merger as creating a strong UK business and as a stepping stone to further consolidation of the UK and international insurance market."

The stock market reacted indifferently to the merger, as shares in NU fell by 9% and those in CGU by 3% after the deal was announced on Monday.

If approved by both sets of shareholders in May, the union will create the UK's largest insurer and tenth largest in Europe, with a market value of around £18 billion.

CGNU, as the group is being called, will have a combined premium income of £23 billion and operating profits of £3 billion.

Bob Scott, chief executive of CGU, presented the new company as a "merger of equals" although CGU is the larger partner, with its shareholders owning 58.5% of the group and NU's 41.5%.

He will be the group's chief executive until he steps down from CGU in June 2001, and NU's Richard Harvey takes over.

But NU is likely to be the senior partner in terms of UK insurance business, as CGNU's general insurance operations will be based at Norwich and its products distributed under the NU brand.

The group will have its head office in London and York has been chosen for its life business.

Annual cost savings from the merger, to be completed by June 2001, are expected to be £250 million.

Some of these savings will come from more than 4,000 UK job losses, out of the 35,000 employed by the group.

Both groups when merged intend to press forward with the best of their combined e-commerce ventures, particularly in the areas of interactive television and online quote services.

Chris Hitchings, analyst at Commerz bank, said the merger, if it works, will create a very strong UK company. He added that UK insurers are currently priced too highly to interest European insurers.

"CGU has a very good asset management business outside the UK but less so here, and NU's position is vice versa. Both are likely to benefit and NU achieves its overseas expansion plans at a stroke."

Analyst David Hudson at HSBC bank thought it unlikely that a continental insurer would attempt to wreck the planned merger with a counter-bid.

He said: "Because it's an agreed bid between CGU and NU it would take a very aggressive action to break it up."